================================================================================
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 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
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CENTER BANCORP, INC.
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(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
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(ADDRESS OF PRINCIPAL EXECUTIVES OFFICES) (ZIP CODE)
(908) 688-9500
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------------------------------------------------------
(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 MARCH 31, 1997
------------------------------------
COMMON STOCK NO PAR VALUE -- 2,352,840 SHARES
<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
ITEM I. Financial Statements
Consolidated Statements of Condition
at March 31, 1997 and December 31, 1996 (Unaudited) ..... 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996
(Unaudited) ............................................. 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996
(Unaudited) ............................................. 5
Notes to the Consolidated Financial Statements .......... 6
In the opinion of Management, all adjustments necessary for a fair
presentation of the financial position and results of operations for the
interim periods have been made. Such adjustments are of a normal recurring
nature. All share and per share amounts have been restated to reflect a 3
for 2 split to shareholders of record May 1, 1996, payable on May 31,
1996. Also reflected is the 5% stock dividend to shareholders of record
May 18, 1997, payable on May 31, 1997. Results for the period ended March
31, 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 .... 7-17
PART II. OTHER INFORMATION ..................................... 18
SIGNATURES ................................................ 19
23-April-97 Center Bancorp, Inc. Form 10-Q Page 2
<PAGE>
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
March 31, December 31,
(DOLLARS IN THOUSANDS) 1997 1996
================================================================================
(unaudited)
Assets:
Cash and due from banks .......................... $ 15,710 $ 19,761
Federal funds sold ............................... 10,000 10,000
Securities purchased under agreement to resell ... 0 13,300
- ------------------------------------------------------------------------------
Total cash and cash equivalents .............. 25,710 43,061
- ------------------------------------------------------------------------------
Investment securities held to maturity
(approximate market value of $238,900 in
1997 and $218,788 in 1996) ..................... 241,220 218,584
Investment securities available for sale ......... 76,882 61,539
- ------------------------------------------------------------------------------
Total investment securities .................. 318,102 280,123
- ------------------------------------------------------------------------------
Loans, net of unearned income .................... 120,686 117,830
Less -- Allowance for loan losses .............. 1,293 1,293
- ------------------------------------------------------------------------------
Net loans .................................... 119,393 116,537
- ------------------------------------------------------------------------------
Premises and equipment, net ...................... 10,006 10,104
Accrued interest receivable ...................... 4,827 4,371
Other assets ..................................... 1,615 1,341
Goodwill ......................................... 3,601 3,681
- ------------------------------------------------------------------------------
Total assets ................................. $483,254 $459,218
==============================================================================
Liabilities
Deposits:
Non-interest bearing ........................... $ 71,398 $ 68,086
Interest bearing:
Certificates of deposit $100,000 and over .... 122,241 99,818
Other ........................................ 251,545 258,750
- ------------------------------------------------------------------------------
Total deposits ............................... 445,184 426,654
Federal funds purchased and securities sold
under agreements to repurchase ................. 5,000 0
Accounts payable and accrued liabilities ......... 2,392 2,351
- ------------------------------------------------------------------------------
Total Liabilities ............................ 452,576 429,005
Stockholders' equity Common stock, no par value:
Authorized 20,000,000 shares; issued
2,666,845 and 2,663,160 shares in 1997 and
1996, respectively ............................. 4,546 4,468
Appropriated surplus ............................. 3,510 3,510
Retained earnings ................................ 24,530 23,738
- ------------------------------------------------------------------------------
32,586 31,716
Less -- Treasury stock at cost (314,005
shares in 1997 and 1996 respectively) .......... 1,814 1,814
Net unrealized gain (loss) on investment
securities available-for-sale, net of taxes .... (94) 311
- ------------------------------------------------------------------------------
Total stockholders' equity ................... 30,678 30,213
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity.... $483,254 $459,218
==============================================================================
23-April-97 Center Bancorp, Inc. Form 10-Q Page 3
<PAGE>
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
------------------
(in thousands, except per share data) 1997 1996
================================================================================
Interest income:
Interest and fees on loans ............................ $2,398 $1,974
Interest and dividends on
investment securities:
Taxable interest income ........................... 4,506 3,593
Nontaxable interest income ........................ 259 284
Interest on Federal funds sold and securities
purchased under agreement to resell ................. 199 109
- --------------------------------------------------------------------------------
Total interest income ........................... 7,362 5,960
- --------------------------------------------------------------------------------
Interest expense:
Interest on certificates of deposit $100,000 or more .. 1,270 868
Interest on other deposits ............................ 2,012 1,501
Interest on short-term borrowings ..................... 107 135
- --------------------------------------------------------------------------------
Total interest expense .......................... 3,389 2,504
Net interest income ............................. 3,973 3,456
- --------------------------------------------------------------------------------
Provision for loan losses ............................... 0 0
Net interest income after provision
for loan losses ....................................... 3,973 3,456
- --------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees ................. 138 114
Other income .......................................... 31 31
Gain on securities sold ............................... 0 0
- --------------------------------------------------------------------------------
Total other income .............................. 169 145
- --------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits ........................ 1,298 1,094
Occupancy expense, net ................................ 278 235
Premises and equipment expense ........................ 328 194
Marketing and advertising ............................. 127 68
Other expenses ........................................ 440 403
- --------------------------------------------------------------------------------
Total other expense ............................. 2,471 1,994
- --------------------------------------------------------------------------------
Income before income tax expense ................ 1,671 1,607
Income tax expense ...................................... 431 372
- --------------------------------------------------------------------------------
Net income ...................................... $1,240 $1,235
================================================================================
EARNINGS PER SHARE:
* (on 2,337,849 average shares
outstanding in 1997, and 2,337,004
in 1996)
Net income $ 0.53 $ 0.52
================================================================================
*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 PAYABLE IN MAY OF 1997
23-April-97 Center Bancorp, Inc. Form 10-Q Page 4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
-----------------------
(Dollars in thousands) 1997 1996
================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 1,240 $ 1,235
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................. 363 184
(Increase) in accrued interest receivable ..... (456) (725)
(Increase) in other assets .................... (274) (269)
Increase (Decrease) in other liabilities ...... 41 (203)
Amortization of premium and accretion of
discount on investment securities, net ...... 78 148
- -------------------------------------------------------------------------------
Net cash provided by operating activities ... 992 370
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available-for-sale ............................. 5,513 1,005
Proceeds from maturities of securities
held-to-maturity ............................... 5,888 12,346
Proceeds from sales of investment
securities available-for-sale .................. 0 30,932
Purchase of securities available-for-sale ....... (21,291) (35,358)
Purchase of securities held-to-maturity ......... (28,572) (54,259)
Net (increase) in loans ......................... (2,856) (1,055)
Property and equipment expenditures, net ........ (185) (237)
- -------------------------------------------------------------------------------
Net cash used in investing activities ....... (41,503) (46,626)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ........................ 18,530 38,206
Dividends paid .................................. (448) (446)
Proceeds from issuance of common stock .......... 78 62
Net increase (decrease) in short term
borrowing ...................................... 5,000 (9,621)
- -------------------------------------------------------------------------------
Net cash provided by financing
activities .................................. 23,160 28,201
- -------------------------------------------------------------------------------
Net decrease in cash and cash
equivalents ................................. (17,351) (18,055)
- -------------------------------------------------------------------------------
Cash and cash equivalents at beginning of
period .......................................... 43,061 30,172
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period ........ 25,710 $ 12,117
===============================================================================
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term ....... $ 3,284 $ 2,512
borrowings Income taxes ........................ $ 530 $ 217
23-April-97 Center Bancorp, Inc. Form 10-Q Page 5
<PAGE>
NOTE 1
ACQUISITION
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA, (Lehigh), a
New Jersey chartered savings and loan in a transaction accounted for under the
purchase method of accounting. At June 28, 1996, Lehigh had assets of $70.9
million (primarily cash and cash equivalents of $53.0 million and loans of $15.0
million) and deposits and stockholders' equity of $68.2 million and $2.7
million, respectively. The Corporation paid $5.5 million for Lehigh, resulting
in goodwill of $3.8 million. The goodwill is being amortized on a straight-line
basis over 15 years. The March 31, 1997 consolidated financial statements of the
Corporation includes assets, liabilities and results of operations of Lehigh
since the acquisition date.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 6
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net income and earnings per share remained relatively even from the first
quarter of 1996 to the first quarter of 1997. Net income for the three months
ended March 31, 1997 was $1,240,000 as compared to $1,235,000 earned for the
comparable three month period of 1996. On a per share basis, earnings were $0.53
as compared to $0.52 for the three months ended March 31, 1996. The annualized
return on average assets was 1.08 percent for the three months ended March 31,
1997 as compared with 1.30 percent for the comparable period in 1996, while the
annualized return on average stockholders' equity was 16.4 percent and 17.5
percent, respectively. Earnings performance for the three months ended March 31,
1997, reflected increased net interest income partially 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 on May 1, 1996 and the 5%
stock dividend which payable on May 18, 1997.
Net interest income is the difference between the interest earned on the
portfolio of earnings assets (principally loans and investments) and the
interest paid for deposits and short-term borrowings which support these assets.
Net interest income is presented below first in accordance with the
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.
NET INTEREST INCOME
=========================================================================
Three months ended
(dollars in thousands) March 31,
- -------------------------------------------------------------------------
Percent
1997 1996 Change
----------------------------------------
Interest income:
Investments .................... $4,765 $3,877 22.9%
Loans, including fees .......... 2,398 1,974 21.5%
Federal funds sold ............. 199 109 82.6%
Total interest income ........ 7,362 5,960 23.5%
- -------------------------------------------------------------------------
Interest expense:
Certificates $100,000 or more .. 1,270 868 46.3%
Deposits ....................... 2,012 1,501 34.0%
Short-term borrowings .......... 107 135 -20.7%
Total interest expense ....... 3,389 2,504 35.3%
- -------------------------------------------------------------------------
NET INTEREST INCOME* ......... 3,973 3,456 15.0%
- -------------------------------------------------------------------------
Tax-equivalent adjustment ....... 133 146 -8.9%
Net interest income on a fully
tax-equivalent basis ........... $4,106 $3,602 14.0%
=========================================================================
* 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 on a fully tax-equivalent basis increased $504,000 or 14.0
percent to approximately $4.1 million for the three months ended March 31, 1997,
from approximately $3.6 million for the comparable period in 1996. The net
interest margin decreased to 3.21 percent from 3.40 percent due to the increased
cost of funds reflecting the continued pressure, in general, on short-term
interest rates. For the first three months of 1997, increase in the average
yield on interest earning-assets of 9 basis points was offset by a more
substantial increase in the average cost of interest-bearing liabilities 28
basis points. 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
23-April-97 Center Bancorp, Inc. Form 10-Q Page 7
<PAGE>
sources and core deposits. The average earning-assets volume related factors,
contributing to the change in net interest income, reflected an increase of
$75.3 million in average earning-assets, as compared with the comparable three
month period in 1996. The net increase in average interest-bearing liabilities
was $73.7 million over the comparable three month period in 1996. The 1997 first
quarter changes in average volumes were primarily due to increased volumes of
loans and taxable investments funded with more costly time deposits.
For the three month period ended March 31, 1997 interest income (tax-equivalent)
increased by $1.4 million or 23.5 percent over the comparable three month period
in 1996. The primary factor contributing to the increase was the previously
cited changes in the growth of earning-assets. The Corporation's loan portfolio
increased on average $21.0 million to $120.9 million from $99.9 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 Corporation's highest
yielding earning-asset) represented 28 percent of the Corporation's
interest-earning assets (on average) during the first quarter of 1997 and 1996.
Interest income generated from the loan portfolio during the first three months
of 1997 was driven by the increased loan demand attributed in part to an
aggressive advertising program.
Investments contributed the most significant change in the earning-asset mix for
the three months ended March 31, 1997. Investment volume was funded by the
increased deposit volumes gained through the Corporation's expanded branch
network. These deposit funds, which increased approximately $73.7 million on
average, were used in investing activities, and interest rate risk management
strategies. Within the investment portfolio the most significant changes in
increased volumes took place among taxable securities 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 month ended March 31, 1997 increased as a result
of the growth in deposit volumes, and the continued 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. For the three months ended March 31, 1997, interest expense
increased $885,000 or 35.3 percent as compared with the comparable three month
period in 1996.
Inflationary fears and the expanding economy have pushed short-term interest
rates up. 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 will continue to exert upward pressure on the cost of funds throughout
1997. Deposit growth during the first quarter continued 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 remained high in the short-term market in the first three months
of 1997, depositors continued to shift funds from lower yielding savings and
money market accounts into higher yielding certificates of deposit. The impact
of this volume change in the deposit mix, coupled with the increased deposit
volume gave rise to the net change in the cost of funds.
For the three months ended March 31, 1997, the Corporation's net interest yield
on a tax-equivalent basis (i.e., net interest income on a tax equivalent basis
as a percent of average interest-earning assets) declined to 3.88 percent from
3.95 percent, for the three months ended March 31, 1996. The decline 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 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.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 8
<PAGE>
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) remained stable at approximately 61 basis points
during the first three months 1997 and 1996. This change has contributed to
increased deposit pricing pressure exerted on interest margins, due to a
shifting of these deposits to interest-bearing accounts.
INVESTMENTS
For the three months ended March 31, 1997, the average volume of investment
securities increased by $45.9 as compared to the same period in 1996. The
tax-equivalent yield on investments increased to 6.62 percent or by 18 basis
points from a yield of 6.44 percent during the three month period ended March
31, 1996. The increased yield on the investment portfolio in 1997 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 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.
At March 31, 1997, the total investment portfolio excluding overnight
investments, averaged $296.0 million, or 68.6 percent of earning-assets, as
compared to $250.0 million or 70.2 percent at March 31, 1996. The principal
components of the investment portfolio are U.S. Government Treasury and Federal
Agency securities.
At March 31, 1997 the net unrealized loss carried as a component of
shareholders' equity amounted to an unrealized loss of $94,000, as compared with
an unrealized gain of $311,000 at December 31, 1996 resulting from the increased
rate environment.
LOANS
Loan growth during the first quarter of 1997 occurred in all segments of the
loan portfolio. This growth resulted primarily from the Corporation's 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 and by the heightened demand in the competing
lending markets that exists.
Analyzing the portfolio for the three months ended March 31, 1997, average loan
volume increased $21.0 million, while the portfolio yield increased 3 basis
points as compared with the same period in 1996. The volume related factors
contributed increased earnings of $417,000 enhanced by $7,000 of rate related
changes. Total average loan volume increased to $120.9 million with a net
interest yield of 7.93 percent, as compared to $99.9 million with a yield of
7.90% for the three months ended March 31, 1996.
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
23-April-97 Center Bancorp, Inc. Form 10-Q Page 9
<PAGE>
considered. Such factors as the level and trend of interest rates and current
economic conditions are also reviewed. At March 31, 1997 the level of allowance
was $1,293,000 as compared to a level of $1,073,000 at March 31, 1996. There was
no provision for loan losses in the first quarter of 1997 and 1996.
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 1.07 percent and 1.09
percent at March 31, 1997, and 1996, respectively. In Management's view the
level of allowance during the first three months of 1997 has been adequate to
cover any loss experience and therefore has not warranted any additions to the
allowance during 1997.
During March 31, 1997, the Corporation did not experience any substantial
problems within its loan portfolio. Net charge-offs were $0. At March 31, 1997
the Corporation had non-performing loans amounting to $297,000 of which $129,000
was in a nonaccrual status at March 31, 1997, and $40,000 non-performing loans
at March 31, 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 in either 1997 or 1996.
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.
Changes in the allowance for possible loans losses for the period ended March
31, 1997 and 1996, respectively, are set forth below.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 10
<PAGE>
ALLOWANCE FOR LOAN LOSSES
(in thousands)
===============================================================================
Three months
ending March 31
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Average loans outstanding ........................... $120,946 $99,916
- -------------------------------------------------------------------------------
Total loans at end of period ........................ 120,686 98,625
- -------------------------------------------------------------------------------
Analysis of the allowance for loan losses
Balance at the beginning of year .................... 1,293 1,073
Charge-offs:
Commercial ......................................... 1 0
Real estate-mortgage ............................... 0 0
Installment loans .................................. 3 0
- -------------------------------------------------------------------------------
Total charge-offs ................................ 4 0
Recoveries:
Commercial ......................................... 0 0
Real estate-mortgage ............................... 0 0
Installment loans .................................. 4 0
- -------------------------------------------------------------------------------
Total recoveries ................................. 4 0
Net Charge-offs: .................................... 0 0
Additions charged to Operations .................... 0 0
===============================================================================
Balance at end of period ........................... $ 1,293 $ 1,073
===============================================================================
Ratio of net charge-offs during the period to
average loans outstanding during the period ........ 0.00% 0.00%
- -------------------------------------------------------------------------------
Allowance for loan losses as a
percentage of total loans ........................... 1.07 1.09
- -------------------------------------------------------------------------------
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 March 31, 1997 and 1996, the Corporation had no restructured loans.
Non-accrual loans amounted to $129,000 at March 31, 1997, and were comprised of
two residential mortgage loans. There were no non-accrual loans as of March 31,
1996. Past due loans 90 days or more and still accruing amounted to $168,000 as
of March 31, 1997 and $40,000 as of 1996. Of the balance, respectively in each
period, $103,000 and $40,000 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 March 31, 1997 and 1996.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 11
<PAGE>
(dollars in thousands) 1997 1996
========================================================
Loans past due 90 days and still
accruing .............................. $168 $40
Non-accrual loans ..................... 129 0
- --------------------------------------------------------
Total non-performing assets ........... $297 $40
========================================================
OTHER NON-INTEREST INCOME
The following table presents the principal categories of non-interest income for
the three month periods ended March 31, 1997 and 1996.
======================================================================
Three months ended
(dollars in thousands) March 31,
- ----------------------------------------------------------------------
1997 1996 % change
- ----------------------------------------------------------------------
Other income:
Service charges, ...................... $138 $114 21.1%
commissions and fees
Other income. ......................... 31 31 0%
Gain on securities sold ............... 0 0 0%
======================================================================
Total other income .............. $169 $145 16.6%
======================================================================
For the three months ended March 31, 1997, total other (non-interest) income
increased $24,000 or 16.6 percent as compared to the three months ended March
31, 1996. The increase in service charges, commissions and fees is primarily a
result of an increase in business activity.
OTHER NON-INTEREST EXPENSE
The following table presents the principal categories of non-interest expense
for the three month periods ended March 31, 1997 and 1996.
===================================================================
Three months ended
(dollars in thousands) March 31,
- -------------------------------------------------------------------
1997 1996 % change
- -------------------------------------------------------------------
Other expense:
Salaries and employee
benefits .................... $1,298 $1,094 18.6%
Occupancy expense, net ........ 278 235 18.3%
Premise & equipment expense ... 328 194 69.1%
Stationery and printing
expense ...................... 76 67 13.4%
Marketing & Advertising ....... 127 68 86.8%
Other expenses ................ 364 336 8.3%
- -------------------------------------------------------------------
Total other expense ..... $2,471 $1,994 23.9%
===================================================================
For the three month period ended March 31, 1997, total other (non-interest)
expenses increased $477,000 or 23.9 percent over the comparable three months
ended March 31, 1996 due largely to expansion of branch network. Salaries and
employee benefits cost coupled with premise and equipment expenses comprised the
primary components of the total increase for the period. Strict control over
other expenses has been a key objective of Management to maximize earnings
efficiency. The Corporation's ratio of other expenses to average assets
experienced a slight increase to 5.3 percent in the first three months of 1997
from 5.2 percent in 1996.
Salaries and employees benefits increased $204,000 or 18.6 percent in first
three months 1997 over the comparable three month period ended March 31, 1996.
This increase is primarily attributable to the increased expense arising from
maintaining almost full staffing levels at the Corporation's existing
facilities, the facilities associated with the Lehigh acquisition and the
Company's new Madison branch. This factor coupled with normal increases through
merit and promotional raises and higher benefit costs contributed to
23-April-97 Center Bancorp, Inc. Form 10-Q Page 12
<PAGE>
the rise in expense. Staffing levels overall amounted to 165 full-time
equivalent employees at March 31, 1997 as compared to 132 full-time equivalent
employees at March 31, 1996.
Occupancy and bank premise and equipment expense for the three month period
ended March 31, 1997 increased $177,000 or 41.2 percent over the comparable
three month period in 1996. This increase in bank premise and equivalent 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. Occupancy expenses similarly
reflects the associated costs of the Corporation's expanded facilities. For the
three month period March 31, 1997, rental expenses increased $39,000 over the
comparable three month period in 1996. These rents are associated with the
acquired Millburn Mall Banking Center and new Madison Banking Center.
PROVISION FOR INCOME TAXES
The effective tax rate for the three month period ended March 31, 1997 was 25.8
percent as compared to 23.1 percent for the three months ended March 31, 1996.
The effective tax rate continues to be substantially less than the statutory
Federal tax rate of 34 percent. The difference between the statutory and the
effective tax rates, other than increased taxable revenues, primarily reflects
the tax-exempt status of interest income on obligations of states and political
subdivisions.
ASSET 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 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.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 13
<PAGE>
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 falling
rate environment.
From time to time, the Corporation may elect to deliberately mismatch
liabilities and assets in a strategic gap position.
At March 31, 1997, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio) of .53:1.00 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
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 March 31, 1997 which provide the Bank with liquidity
remain strong with approximately $31.2 million in anticipated repayments and
maturities over the next twelve months.
The Corporation derives a significant proportion of its liquidity from its core
deposit base. At March 31, 1997, core deposits (comprised of total demand and
savings accounts plus money market accounts under $100,000) represented 51.1
percent of total deposits. More volatile rate sensitive deposits, concentrated
in Certificates of deposit $100,000 and greater, increased to 27.5 percent of
total deposits from 23.4 percent at March 31, 1996. This change has been brought
about due to the rise in short-term rates during the latter part of 1996 which
continued into 1997.
The increase in average funding sources during the three months ended March 31,
1997 resulted primarily from an increase in business and public fund deposits
offset by a decrease of $3.0 million 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 16.2 percent on average as compared
to 17.9 percent for the three month period ended March 31, 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. Average short-term borrowings during the first three months of 1997
were $8.1 million, a decrease of $3.1 million or 27.4 percent from $11.2 million
in average short-term borrowings during the comparable three months ended March
31, 1996. This change was due to a decrease of insufficient funding liquidity
from deposit activity.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 14
<PAGE>
CASH FLOW
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. During the three
months ended March 31, 1997, cash and cash equivalents (which decreased overall
by $ 17.3) were provided (on a net basis) by operating and financing activities
and used in investing activities to purchase investments and expand loan volume.
The cash flow for these investment activities was provided by an increase in
deposits of $18.5 million and an increase in short term borrowings of $5.0
million.
SHAREHOLDER'S EQUITY
Shareholders' equity averaged $30.6 million for the three month period ended
March 31, 1997, an increase from $28.4 million, or 8.1 percent, as compared to
the same period in 1996. The Corporation's dividend reinvestment and optional
stock purchase plan raised $78,000 in new capital for the three months ended
March 31, 1997. Tangible book value per common share, which has been restated to
reflect the 5% stock dividend effective May 18, 1997, payable May 31, 1997 and
the 3-for-2 stock split effective May 1, 1996, paid May 31, 1996, was $11.50 at
March 31, 1997 as compared to $11.29 at December 31, 1996, reflecting the
goodwill associated with the Lehigh acquisition.
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
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at March 31, 1997, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets
of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively.
At March 31, 1997, total Tier l capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $27.2
million or 5.60 percent of total assets. The total Tier I leverage capital ratio
was 5.87 percent of total assets. Tier I capital excludes the effect of SFAS No.
115, which amounted to $94,000 of net unrealized loss, after tax, on securities
available-for-sale (included as a component of stockholders' equity) and
goodwill of $3,601,000 as of March 31, 1997.
At March 31, 1997, the Corporation's estimated Tier I and total risk-based
capital ratios were 15.80 percent and 16.55 percent, respectively. These ratios
are well above the minimum guidelines of capital to risk-adjusted assets in
effect as of March 31, 1997.
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 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%.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 15
<PAGE>
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 March 31, 1997, management believes that the Bank meets all capital
adequacy requirements to which it is subject.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 16
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 125
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 did not have a material effect on the Corporation's
financial condition or results of operations.
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.
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 companies1 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
(although pro forma EPS disclosure in the footnotes for periods prior to
required adoption is 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.
- ---------------
1 That is, investment companies that comply with the requirement of the AICPA
Audit and Accounting Guide, Audits of Investment Companies, to present
selected per share data.
23-April-97 Center Bancorp, Inc. Form 10-Q Page 17
<PAGE>
II. OTHER INFORMATION
Item 4 Submission of Matters to Vote of Security Holders
a) The Annual Meeting of shareholders was held on Tuesday,
April 15, 1997.
The Following Class 2 Directors' were re-elected for three year terms based
on the following share votes
For Withheld
--------- --------
Hugo Barth, III 1,727,644 28,119
Stanley R. Sommer 1,727,644 28,119
Alexander A. Bol 1,727,644 28,119
William A. Thompson 1,727,644 28,119
The Following Class 1 Directors' terms continue until the 1998 Annual
meeting
John J. Davis
Donald G. Kein
Charles P. Woodward
Brenda Curtis
The following Class 3 Directors' terms continue until the 1999 Annual
meeting
Robert L. Bischoff
Paul Lomakin, Jr.
Herbert Schiller
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits - 27.1 Financial Data Schedule
b) Reports on Form 8-K during the quarter ended March 31,
1997: None
23-April-97 Center Bancorp, Inc. Form 10-Q Page 18
<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)
23-April-97 Center Bancorp, Inc. Form 10-Q Page 19
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