<PAGE>
SECURITIES & 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
March 31, 1998 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
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(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)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes|X| No|_|
Shares outstanding on March 31, 1998
- ------------------------------------
Common stock no par value - 3,553,799 shares
<PAGE>
CENTER BANCORP INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition
March 31, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997 4
(unaudited)
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
(unaudited)
Notes to the Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits 17
Signature 18
Exhibit Index 19
Page 2
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<TABLE>
<CAPTION>
Center Bancorp Inc.
Consolidated Statements of Condition
March 31, December 31,
(Dollars in thousands) 1998 1997
=======================================================================================================
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $10,665 $15,210
Federal funds sold 4,200 10,900
Securities purchased under agreement to resell 1,230 0
- -------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 16,095 26,110
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Investment securities held to maturity (approximate
market value of $177,014 in 1998 and $198,960 in 1997) 174,709 196,980
Investment securities available-for- sale 125,237 101,318
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Total investment securities 299,946 298,298
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Loans, net of unearned income 134,669 132,424
Less - Allowance for loan losses 1,297 1,269
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Net loans 133,372 131,155
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Premises and equipment, net 9,067 9,130
Accrued interest receivable 4,016 4,350
Other assets 896 687
Goodwill 3,301 3,382
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Total assets $466,693 $473,112
=======================================================================================================
Liabilities
Deposits:
Non-interest bearing $73,492 $77,821
Interest bearing:
Certificates of deposit $100,000 and over 100,484 116,746
Savings and Time Deposits 244,547 241,443
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Total deposits 418,523 436,010
Federal funds purchased and securities sold under
agreements to repurchase 10,515 700
Accounts payable and accrued liabilities 3,275 2,980
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Total liabilities 432,313 439,690
Stockholders' equity:
Common stock, no par value: Authorized 20,000,000 shares;
issued 4,017,065 and 4,012,372 in 1998 and 1997 7,373 7,296
Additional paid-in-capital 3,571 3,513
Retained earnings 24,489 23,829
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35,433 34,638
Less - Treasury stock at cost (463,266 and 470,202 shares in 1998
and 1997, respectively) 1,780 1,808
Accumulated other comprehensive income 727 592
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Total stockholders' equity 34,380 33,422
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Total liabilities and stockholders' equity $466,693 $473,112
=======================================================================================================
</TABLE>
All share and per share amounts have been restated to reflect the
3-for-2 stock split payable on May 29, 1998 to stockholders of record
May 1, 1998 and the 5% stock dividend paid in May of 1997.
See Accompanying Notes to Consolidated Financial Statements
Page 3
<PAGE>
Center Bancorp Inc.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
(Dollars in thousands, except per share data) 1998 1997
- -------------------------------------------------------------------------- ----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,672 $ 2,398
Interest and dividends on investment securities:
Taxable interest income 4,611 4,506
Nontaxable interest income 193 259
Interest on Federal funds sold and securities
purchased under agreement to resell 49 199
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Total interest income 7,525 7,362
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Interest expense:
Interest on certificates of deposit $100,000 or more 1,311 1,270
Interest on savings and time deposits 2,001 2,012
Interest on short-term borrowings 153 107
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Total interest expense 3,465 3,389
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Net interest income 4,060 3,973
Provision for loan losses 30 0
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Net interest income after provision for loan losses 4,030 3,973
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Other income:
Service charges, commissions and fees 180 138
Other income 43 31
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Total other income 223 169
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Other expense:
Salaries and employee benefits 1,335 1,298
Occupancy expense, net 262 278
Premises and equipment expense 271 328
Marketing and Advertising 109 127
Legal and Consulting 75 49
Other expenses 525 391
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Total other expense 2,577 2,471
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Income before income tax expense 1,676 1,671
Income tax expense 543 431
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Net income $ 1,133 $ 1,240
========================================================================== ==========
Earnings per share: $ $
Basic 0.32 0.35
Diluted 0.32 0.35
========================================================================== ==========
Weighted average common shares outstanding:
Basic 3,548,681 3,524,612
Diluted 3,591,299 3,542,409
========================================================================== ==========
</TABLE>
All share and per share amounts have been restated to reflect the
three-for-two stock split payable on May 29, 1998 to stockholders of record
May 1, 1998 and the 5% stock dividend paid in May of 1997
See Accompanying Notes to Consolidated Financial Statements
Page 4
<PAGE>
Center Bancorp Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
(Dollars in thousands) 1998 1997
===================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,133 $ 1,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 338 363
Provision for loan losses 30 0
(Increase) decrease in accrued interest receivable 334 (456)
Increase in other assets (239) (274)
Increase in other liabilities 295 41
Amortization of premium and accretion of
discount on investment securities, net 66 78
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Net cash provided by operating activities 1,957 992
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 26,432 5,513
Proceeds from maturities of securities held-to-maturity 12,189 5,888
Purchase of securities available-for-sale (28,668) (21,291)
Purchase of securities held-to-maturity (11,532) (28,572)
Net increase in loans (2,217) (2,856)
Property and equipment expenditures, net (194) (185)
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Net cash used in investing activities (3,990) (41,503)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (17,487) 18,530
Dividends paid (473) (448)
Proceeds from issuance of common stock 163 78
Net increase in short term borrowing 9,815 5,000
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Net cash (used in) provided by financing activities (7,982) 23,160
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Net decrease in cash and cash equivalents (10,015) (17,351)
- ------------------------------------------------------------------------------- ---------
Cash and cash equivalents at end of period $ 16,095 $ 25,710
=============================================================================== =========
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings $ 3,410 $ 3,389
Income taxes $ 537 $ 530
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
Page 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.
In the opinion of Management, all adjustments necessary for a fair presentation
of the Corporation'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 the
3-for-2 stock split payable May 29, 1998 to stockholders of record on May 1,
1998. Also reflected and restated for all prior periods is the 5% stock dividend
paid on May 31, 1997. Results for the period ended March 31, 1998 are not
necessarily indicative of results for any other interim period or for the entire
fiscal year. Reference is made to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1997 for information regarding accounting
principles.
NOTE 2
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 125
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. SFAS No. 125 was effective for transfers occurring after December
31, 1996, and was applied prospectively. Subsequently, the FASB issued SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125,"
which deferred until January 1,1998, the implementation of certain aspects of
the original statement that addressed secured borrowings and collateral
transactions. The adoption of SFAS No. 127 is not expected to have a material
effect on the Corporation's future financial condition or results of operations.
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
Page 6
<PAGE>
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. The Corporation adopted Statement
130 on January 1, 1998 and the required disclosure is contained in the table set
forth below.
Three Months Ended March 31,
(in thousands) 1998 1997
---- ----
Comprehensive Income
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Net Income $1,133 $1,240
Other comprehensive income
Unrealized holding gains(losses) arising
during the period, net of taxes 135 (405)
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Other comprehensive income 135 (405)
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Total comprehensive income $1,268 $ 835
=============================================================================
SFAS No. 132
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This Statement standardizes the
disclosure requirements for pensions and other postretirement benefits by
requiring additional information that will facilitate financial analysis, and
eliminating certain disclosures that are considered no longer useful. SFAS No.
132 supersedes the disclosure requirements in SFAS Nos. 87, 88, and 106. This
Statement is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is nor readily available.
Page 7
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income and earnings per share (Basic and Diluted) declined from the first
quarter of 1997 to the first quarter of 1998. Net income for the three months
ended March 31, 1998 was $1,133,000 as compared to $1,240,000 earned for the
comparable three month period of 1997. On a diluted per share basis, earnings
were $0.32 as compared to $0.35 for the three months ended March 31, 1997. The
annualized return on average assets was 0.96 percent for the three months ended
March 31, 1998 as compared with 1.06 percent for the comparable period in 1997,
while the annualized return on average stockholders' equity was 13.25 percent
and 16.19 percent, respectively. Earning performance for the three months ended
March 31, 1998 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 payable May
29, 1998 to stockholders of record May 1, 1998 and the 5% stock dividend paid in
May 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.
Net Interest Income
================================================================================
(dollars in thousands) Three months ended
March 31,
Percent
1998 1997 Change
------------------------ -----------
Interest income:
Investments $ 4,804 $ 4,765 .82
Loans, including fees 2,672 2,398 11.43
Federal funds sold 49 199 (75.38)
-------- --------
Total interest income 7,525 7,362 2.21
- ------------------------------------------- --------
Interest expense:
Certificates $100,000 or more 1,311 1,270 3.23
Savings and Time 2,001 2,012 .55
Short-term borrowings 153 107 42.99
-------- --------
Total interest expense 3,465 3,389 2.24
- ------------------------------------------- --------
NET INTEREST INCOME* 4,060 3,973 2.19
- ------------------------------------------- --------
Tax-equivalent adjustment 99 133 (25.56)
Net interest income on a fully
tax-equivalent basis $ 4,159 $ 4,106 1.29
=========================================== ======== ======
* 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 $53,000 or 1.3
percent to approximately $4.2 million for the three months ended March 31, 1998,
from approximately $4.1 million for the comparable period in 1997. The net
interest spread decreased to 3.11 percent from 3.21 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 1998, increase in the average
yield on interest earning-assets of 8 basis points was offset by a more
substantial increase in the average cost of interest-bearing liabilities of 18
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 sources and core deposits. Average earning-assets increased
$8.8 million, as compared with the three month period in 1997. The net decrease
in average interest-bearing liabilities was $4.3 million over the comparable
three month period in 1997. The 1998 first quarter changes in average volumes
were primarily due to increased volumes of loans and taxable investments funded
with more costly time deposits.
Page 8
<PAGE>
For the three month period ended March 31, 1998, interest income
(tax-equivalent) increased by $129,000 or 1.7 percent over the comparable three
month period in 1997. The primary factor contributing to the increase was the
previously cited growth of earning-assets. The Corporation's loan portfolio
increased on average $13.7 million to $134.6 million from $120.9 million in the
same quarter in 1997, primarily reflecting growth in commercial loans,
commercial mortgages and home equity lines of credit. This growth was funded
through a decrease in cash and cash equivalents and increased short term
borrowing. The loan portfolio (traditionally the Corporation's highest yielding
earning-asset) represented 31 and 28 percent, of the Corporation's
interest-earning assets (on average) during the first quarter of 1998 and 1997,
respectively. Interest income generated from the loan portfolio during the first
three months of 1998 was driven by the increased loan demand attributed in part
to an aggressive advertising program.
Within the investment portfolio the modest changes in increased volumes took
place among taxable securities which offset 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, 1998 increased as a result
of 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, 1998, interest expense increased $76,000 or 2.2 percent as
compared with the comparable three month period in 1997 despite a decrease in
average interest bearing liabilities of $4.3 million.
Inflationary concerns and the expanding economy have pushed short-term interest
rates up. This in turn has affected 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 1998. 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 1998, depositors
continued to shift funds from lower yielding savings and money market accounts
into higher yielding time deposit. The impact of this change in the deposit mix,
coupled with the decreased deposit volume gave rise to the net change in the
cost of funds.
For the three months ended March 31, 1998, 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) increased to 3.83 percent from
3.80 percent, for the three months ended March 31, 1997. The increase noted
reflected a narrowing of spreads between yields earned on loans and investments
and rates paid for supporting funds. There was a favorable change in the mix of
supporting interest-earning assets, primarily the increased loan and investment
volumes. However, this was offset to some extent by the change in the mix of
interest-bearing liabilities to more costly funding.
The contribution of noninterest-bearing sources (i.e. the differential between
the average rate paid on all sources of funds and the average rate paid on
interest-bearing sources)increased to approximately 72 basis points during the
first three months of 1998 compared to 58 basis points for 1997. This increase
was partially due to a $3.7 million increase in interest-free funds resulting
from an increase in demand deposits and a decrease in cash balances resulting
from lower reserve requirements.
Page 9
<PAGE>
Investments
For the three months ended March 31, 1998, the average volume of investment
securities increased by $1.2 million as compared to the same period in 1997. The
tax-equivalent yield on investments decreased to 6.58 percent or by 4 basis
points from a yield of 6.62 percent during the three month period ended March
31, 1997. The decreased yield on the investment portfolio in 1998 resulted from
lower market rates on purchases made to replace higher yielding investments
which had matured, were prepaid or were called.
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, 1998, the total investment portfolio, excluding overnight
investments, averaged $297.2 million, or 67.5 percent of earning-assets, as
compared to $296.0 million or 68.6 percent of earning-assets at March 31, 1997.
The principal components of the investment portfolio are U.S. Government
Treasury and Federal Agency securities.
At March 31, 1998 the net unrealized gain included in the accumulated other
comprehensive income component of shareholders' equity amounted to an unrealized
gain of $727,000, as compared with an unrealized gain of $592,000 at December
31, 1997 resulting from the increased volume in the available for sale portfolio
coupled with a restructuring of the portfolio in the fourth quarter of 1997.
Loans
Loan growth during the first quarter of 1998 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.
Analyzing the portfolio for the three months ended March 31, 1998, average loan
volume increased $13.7 million, while the portfolio yield increased 12 basis
points as compared with the same period in 1997. The volume related factors
contributed increased earnings of $233,000 enhanced by $40,000 of rate related
changes. Total average loan volume increased to $134.6 million with a net
interest yield of 8.05 percent, as compared to $120.9 million with a yield of
7.93% for the three months ended March 31, 1997.
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 March 31, 1998 the allowance was $1,297,000 as compared to
$1,269,000 at December 31, 1997 and $1,293,000 at March 31, 1997. The provision
for loan losses for the quarter ended March 31, 1998 amounted to $30,000. There
was no provision for loan losses in the first quarter of 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 .96 percent and 1.07
percent at March 31, 1998, and 1997, respectively.
Page 10
<PAGE>
In Management's view the level of the allowance during the first three months of
1998 has been adequate to cover any loss experience.
During the quarter ended March 31, 1998, the Corporation did not experience any
substantial problems within its loan portfolio. Net charge-offs were $2,000. At
March 31, 1998 the Corporation had non-performing loans amounting to $308,000 of
which $225,000 was in non-accrual status, versus $100,000 in non-performing
loans at December 31, 1997 of which $27,000 was in non-accrual status and
$297,000 in non-performing loans at March 31, 1997 of which $129,000 was in non
accrual status. 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, doubtful or loss, 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 1998 or
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.
Changes in the allowance for possible loans losses for the period ended March
31, 1998 and 1997, respectively, are set forth below.
Allowance for loan losses
(in thousands)
================================================================================
Three months ending March 31
----------------------------
1998 1997
Average loans outstanding $ 134,643 $ 120,946
- --------------------------------------------------------------------------------
Total loans at end of period 134,669 120,686
- --------------------------------------------------------------------------------
Analysis of the allowance for loan losses
Balance at the beginning of period 1,269 1,293
Charge-offs:
Commercial 0 1
Real estate-mortgage 0 0
Installment loans 7 3
- --------------------------------------------------------------------------------
Total charge-offs 7 4
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 5 4
- --------------------------------------------------------------------------------
Total recoveries 5 4
Net Charge-offs: 2 0
Provision for Loan Losses 30 0
- --------------------------------------------------------------------------------
Balance at end of period $ 1,297 $ 1,293
================================================================================
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 .96 1.07
total loans
- --------------------------------------------------------------------------------
Page 11
<PAGE>
Asset Quality
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
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 status when it again becomes well secured and in
the process of collection and 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, 1998 , December 31, 1997 and March 31, 1997, the Corporation had no
restructured loans. Non-accrual loans amounted to $225,000 at March 31, 1998,
and were comprised of residential mortgage and home equity loans. At December
31, 1997 non-accrual loans amounted to $27,000 comprised of home equity loans.
Non-accrual loans as of March 31, 1997 amounted to $129,000 and were comprised
of two residential mortgage loans. Past due loans 90 days or more and still
accruing amounted to $83,000 as of March 31, 1998 , $73,000 at December 31, 1997
and $168,000 as of March 31, 1997. All of such loans at March 31, 1998, December
31, 1997 and March 31, 1997, consisted 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, 1998, December 31, 1997 or March
31, 1997.
- ------------------------------------------------ -----------------------------
Non-Performing Assets Three Months Ended
March 31,
(dollars in thousands) 1998 1997
==============================================================================
Loans past due 90 days and still accruing $ 83 $168
Non-accrual loans 225 129
- ------------------------------------------------------------------------------
Total non-performing assets $308 $297
==============================================================================
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three month periods ended March 31, 1998 and 1997.
==============================================================================
(dollars in thousands) Three months ended
March 31,
1998 1997 % change
-------- -------- --------
Other income:
Service charges, commissions and $ 180 $ 138 30.4%
fees
Other income. 43 31 38.7%
-------- -------- ----------
Total other income $ 223 $ 169 31.9%
==============================================================================
For the three months ended March 31, 1998, total other (non-interest) income
increased $54,000 or 31.9 percent as compared to the three months ended March
31, 1997. The increase in service charges, commissions and fees is primarily a
result of an increase in automated teller machine charges offset in part by a
decline in account service charges.
Page 12
<PAGE>
Other Non-interest Expense
The following table presents the principal categories of non-interest expense
for the three month periods ended March 31, 1998 and 1997.
================================================================================
(dollars in thousands) Three months ended
March 31,
Other expense: 1998 1997 % change
------ ------ --------
Salaries and employee benefits $ 1,335 $ 1,298 2.9%
Occupancy expense, net 262 278 (6.3)%
Premise & equipment expense 271 328 (17.4)%
Marketing & advertising 109 127 (14.2)%
Legal and consulting 75 49 53.1%
Other expenses 525 391 34.3%
------- ------- --------
Total other expense $ 2,577 $ 2,471 4.3%
================================================================================
For the three month period ended March 31, 1998 total other (non-interest)
expenses increased $106,000 or 4.3 percent over the three months ended March 31,
1997. Salaries and employee benefits costs coupled with legal and consulting and
other expenses comprised the primary components of the total increase for the
period. Prudent management of 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 5.4 percent in the
first three months of 1998 from 5.3 percent in the first three months of 1997.
The Corporation's efficiency ratio (defined as non-interest expenses divided by
taxable-equivalent net interest income plus non-interest income) at March 31,
1998 was 58.8 percent compared to 57.8 percent for the first quarter of 1997
Salaries and employees benefits increased $37,000 or 2.9 percent in the first
three months 1998 over the comparable three month period ended March 31, 1997.
This increase is primarily attributable to normal merit increases; promotional
raises and higher benefit costs. Staffing levels overall amounted to 144
full-time equivalent employees at March 31, 1998 as compared to 151 full-time
equivalent employees at March 31, 1997.
Occupancy and bank premise and equipment expense for the three month period
ended March 31, 1998 decreased $73,000 or 12.0 percent over the comparable three
month period in 1997. This decrease in bank premise and equipment expense in
1998 is primarily attributable to lower operating costs of the Corporation's
facilities coupled with a lower depreciation expense. Occupancy expenses also
reflect lower weather related operating expenses of the Corporation's
facilities. For the three month period ended March 31, 1998, rental expenses
increased $8,000 over the comparable three month period in 1997. These increased
rents are associated with lease renewals and the new Morristown Banking Center.
Provision for Income Taxes
The effective tax rate for the three month period ended March 31, 1998 was 32.4
percent as compared to 25.8 percent for the three months ended March 31, 1997.
The effective tax rate for the first quarter of 1998 approximates the statutory
Federal tax rate of 34 percent, primarily reflecting the decrease in tax-exempt
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.
Page 13
<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 rare sensitive liabilities (RSL). For example, a
short funded position (liabilities repricing before assets) would be expressed
as a net negative position, when period gaps are computed by subtracting
repricing liabilities from repricing assets. When using the ratio method, a
RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1
indicates an asset sensitive position, and a ratio less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net
interest margins in a falling rate environment and to reduce net interest
margins in a rising rate environment. Conversely, when a positive gap occurs,
generally margins expand in a rising rate environment and contract in a 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, 1998, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio) of .55:1.0 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 1998.
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 cash
flows, 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, 1998 which provide the Bank with liquidity
remain strong with approximately $63 million in anticipated repayments and
maturities 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 upon
a number of factors, including the liquidity needs of the Bank's customers, the
availability of sources of liquidity and general economic conditions.
Page 14
<PAGE>
The Corporation derives a significant proportion of its liquidity from its core
deposit base. At March 31, 1998, core deposits (comprised of total demand and
savings accounts plus money market accounts under $100,000) represented 50.3
percent of total deposits. More volatile rate sensitive deposits, concentrated
in certificates of deposit $100,000 and greater, decreased to 23.7 percent of
total deposits from 27.5 percent at March 31, 1997.
The decrease in average funding sources during the three months ended March 31,
1998 resulted primarily from a decrease in core deposits offset by an increase
of $3.2 million in Federal funds purchased and securities sold under agreement
to repurchase. Non-interest bearing funding sources as a percentage of the
funding mix increased to 17.5 percent on average as compared to 16.2 percent for
the three month period ended March 31, 1997. Demand deposits as a percentage of
the funding mix replaced more expensive interest-bearing core deposits.
Short-term borrowings can be used to satisfy daily funding needs. Balances in
these accounts fluctuate 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 1998 were $11.3
million, an increase of $3.2 million or 39.5 percent from $8.1 million in
average short-term borrowings during the comparable three months ended March 31,
1997. This change was due to a decrease in core deposits.
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, 1998, cash and cash equivalents (which decreased overall
by $10.0 million) were provided (on a net basis) by operating and financing
activities and used in investing activities to expand loan volume and purchase
investments. The cash flow for these investment activities was provided by a
decrease in cash and cash equivalents and an increase in short term borrowings
of $9.8 million.
Shareholder's Equity
Shareholders' equity averaged $34.3 million for the three month period ended
March 31, 1998, an increase from $30.6 million, or 12.1 percent, as compared to
the same period in 1997. The Corporation's dividend reinvestment and optional
stock purchase plan raised $163,000 in new capital for the three months ended
March 31, 1998. Tangible book value per common share, which has been restated to
reflect the 5% stock dividend paid May 31, 1997 and the 3-for-2 stock split
payable on May 29, 1998 to stockholders of record May 1, 1998, was $8.75 at
March 31, 1998 as compared to $7.67 at March 31, 1997.
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, 1998, 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, 1998, total Tier I capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $30.4
million or 6.50 percent of total assets. The total Tier I leverage capital ratio
was 6.51 percent of total assets. Tier I capital excludes the effect of SFAS No.
115, which amounted to $727,000 of net unrealized gain, after tax, on securities
available-for-sale (included in the accumulated other comprehensive income
component of stockholders' equity) and goodwill of $3,301,000 as of March 31,
1998.
Page 15
<PAGE>
At March 31, 1998, the Corporation's estimated Tier I and total risk-based
capital ratios were 15.92 percent and 16.60 percent, respectively. These ratios
are well above the minimum guidelines of capital to risk adjusted assets in
effect as of March 31, 1998.
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%.
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, 1998, management believes that the Bank meets all capital
adequacy requirements to which it is subject.
YEAR 2000 CENTURY DATE CHANGE
In May 1997, the Federal Financial Institutions Examination Council
(FFIEC) issued a joint statement updating its prior statement, issued in June of
1996, addressing the assessment and preparedness for the Year 2000 Century date
change. Regulators have defined a formal year 2000 management process to assist
the financial industry in dealing with this issue on a timely basis.
The year 2000 century date change poses a significant challenge for
financial institutions, as well as all businesses, because many computer
programs and applications will cease to function normally as a result of the way
that date fields have been programmed historically. This date problem exists
because the two-digit representation of the year will be interpreted in many
applications to mean the year 1900, not 2000, unless the date or program logic
is changed. The result could be a number of errors, including incorrect
mathematical calculations and lost system files.
The Corporation has implemented a strategic plan for Year 2000
compliance. The project objectives include assessment of the full effect of the
Year 2000 issue, system development for testing and implementing solutions,
determining how the Corporation will coordinate processing capabilities with its
customer, vendor, and payment partners, and determining internal control
requirements.
By June 1998, management expects to have completed the first several
phases of the plan, including identification, modification , and testing.
Management's goal is to be compliant with regulatory guidelines by December
1998, although no assurances can be given that the Corporation will be able to
satisfy this objective. At present, management is unable to make a reliable
estimate of the total costs to the Corporation of achieving Year 2000
compliance. However, management does not believe that such costs will be
material to the Corporation's consolidated financial condition, full-year
results of operations or liquidity. The immediately preceding sentence
constitutes a forward-looking statement under the Private Securities Litigation
Reform Act of 1995. Actual results could differ materially from the
Corporation's forward-looking statement as a result of a variety of factors,
including potential unavailability of technological resources, increased
expenses associated with obtaining such resources and unanticipated
technological difficulties.
Page 16
<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, 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 2 Changes in Securities
On April 14, 1998, the Board of Directors of the registrant approved a
three-for-two split on the common stock of the registrant, payable on May 29,
1998 to stockholders of record May 1, 1998. All share data has been
retroactively adjusted for the common stock split.
Item 4 Submission of Matters to Vote of Security Holders
a) The Annual Meeting of shareholders was held on Tuesday, April 14,1998.
The following Class 1 Directors , whose three year terms will expire in 2001,
were re-elected based on the following share votes.
For Withheld
John J. Davis 2,007,478 2,912
Brenda Curtis 2,009,673 717
Donald G. Kein 2,006,790 3,600
Charles P. Woodward 2,006,790 3,600
The following Class 3 Directors terms continue until the 1999 Annual Meeting
Robert L. Bischoff
Paul Lomakin, Jr.
Herbert Schiller
The following Class 2 Directors terms continue until the 2000 Annual Meeting
Hugo Barth
Stanley R. Sommer
Alexander A. Bol
William A. Thompson
Item 6 Exhibits and Reports on Form 8-K
A) Exhibits: Exhibit (27-1) - Center Bancorp Inc. Financial Data
Schedule - March 31, 1998
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended March 31, 1998.
Pagea 17
<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)
Page 18
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