<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 September 30, 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
CENTER BANCORP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-1273725
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 Morris Avenue, Union, New Jersey 07083
- --------------------------------------------------------------------------------
(Address of principal executives offices) (Zip Code)
(908) 688-9500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes|X| No|_|
Shares outstanding on September 30, 1998
- ----------------------------------------
Common stock no par value - 3,573,249 shares
<PAGE>
CENTER BANCORP INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item I. Financial Statements
Consolidated Statements of Condition
at September 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited) 5
Notes to the Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits 18
Signature 19
Exhibit Index 20
2
<PAGE>
Center Bancorp Inc.
Consolidated Statements of Condition
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 12,491 $ 15,210
Federal funds sold 0 10,900
- -------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 12,491 26,110
- -------------------------------------------------------------------------------------------------------------
Investment securities held to maturity (approximate
market value of $185,170 in 1998 and $198,960 in 1997) 181,459 196,980
Investment securities available for sale 113,474 101,318
- -------------------------------------------------------------------------------------------------------------
Total investment securities 294,933 298,298
- -------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 142,885 132,424
Less - Allowance for loan losses 1,357 1,269
- -------------------------------------------------------------------------------------------------------------
Net loans 141,528 131,155
- -------------------------------------------------------------------------------------------------------------
Premises and equipment, net 9,246 9,130
Accrued interest receivable 4,200 4,350
Other assets 996 687
Goodwill 3,139 3,382
- -------------------------------------------------------------------------------------------------------------
Total assets $466,533 $473,112
- -------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Non-interest bearing $ 74,488 $ 77,821
Interest bearing:
Certificates of deposit $100,000 and over 59,668 116,746
Savings and time deposits 243,091 241,443
- -------------------------------------------------------------------------------------------------------------
Total deposits 377,247 436,010
Federal funds purchased and securities sold under
Agreements to repurchase 48,661 700
Accounts payable and accrued liabilities 3,993 2,980
- -------------------------------------------------------------------------------------------------------------
Total Liabilities 429,901 439,690
Stockholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,026,337 and
4,012,373 shares in 1998 and 1997 respectively 7,543 7,296
Additional paid in capital 3,656 3,513
Retained earnings 25,411 23,829
- -------------------------------------------------------------------------------------------------------------
36,610 34,638
Less - Treasury stock at cost (453,088 shares in 1998 and 470,202 shares
In 1997 respectively) 1,739 1,808
Accumulated other comprehensive income 1,761 592
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 36,632 33,422
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $466,533 $473,112
=============================================================================================================
</TABLE>
All share amounts have been restated to reflect the 3-for-2 stock split
distributed on May 29, 1998 to stockholders of record May 1, 1998 and the 5%
stock dividend distributed in May of 1997.
See Accompanying Notes To Consolidated Financial Statements
3
<PAGE>
Center Bancorp Inc.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(in thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,738 $ 2,492 $ 8,108 $ 7,345
Interest and dividends on investment securities:
Taxable interest income 4,700 5,032 13,929 14,470
Nontaxable interest income 166 228 533 727
Interest on Federal funds sold and securities
Purchased under agreement to resell 154 147 440 455
- --------------------------------------------------------------------------- ----------- ----------- -----------
Total interest income 7,758 7,899 23,010 22,997
- --------------------------------------------------------------------------- ----------- ----------- -----------
Interest expense:
Interest on certificates of deposit $100,000 or more 995 1,575 3,622 4,340
Interest on savings and time deposits 2,040 2,043 5,979 6,068
Interest on short-term borrowings 371 194 847 489
- --------------------------------------------------------------------------- ----------- ----------- -----------
Total interest expense 3,406 3,812 10,448 10,897
- --------------------------------------------------------------------------- ----------- ----------- -----------
Net interest income 4,352 4,087 12,562 12,100
Provision for loan losses 30 0 90 0
- --------------------------------------------------------------------------- ----------- ----------- -----------
Net interest income after provision for loan losses 4,322 4,087 12,472 12,100
- --------------------------------------------------------------------------- ----------- ----------- -----------
Other income:
Service charges, commissions and fees 188 166 536 441
Other income 74 27 155 97
- --------------------------------------------------------------------------- ----------- ----------- -----------
Total other income 262 193 691 538
- --------------------------------------------------------------------------- ----------- ----------- -----------
Other expense:
Salaries and employee benefits 1,534 1,545 4,300 4,227
Occupancy expense, net 285 243 805 763
Premises and equipment expense 317 343 871 992
Stationery and printing expense 130 73 317 269
Marketing and advertising 161 74 363 282
Other expenses 674 594 1,865 1,526
- --------------------------------------------------------------------------- ----------- ----------- -----------
Total other expense 3,101 2,872 8,521 8,059
- --------------------------------------------------------------------------- ----------- ----------- -----------
Income before income tax expense 1,483 1,408 4,642 4,579
Income tax expense 504 492 1,574 1,477
- --------------------------------------------------------------------------- ----------- ----------- -----------
Net income $ 979 $ 916 $ 3,068 $ 3,102
- --------------------------------------------------------------------------- ----------- ----------- -----------
Earnings per share
Basic $ 0.27 $ 0.26 $ 0.86 $ 0.88
Diluted 0.27 0.26 0.85 0.87
- --------------------------------------------------------------------------- ----------- ----------- -----------
Average weighted common shares outstanding
Basic 3,570,300 3,536,414 3,559,300 3,531,612
Diluted 3,597,831 3,584,475 3,594,415 3,565,335
- --------------------------------------------------------------------------- ----------- ----------- -----------
</TABLE>
All share amounts have been restated to reflect the 3-for-2 stock split
distributed on May 29, 1998 to stockholders of record May 1, 1998 and the 5%
stock dividend distributed in May of 1997.
See Accompanying Notes To Consolidated Financial Statements
4
<PAGE>
Center Bancorp Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------------
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,068 $ 3,102
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,029 1,109
Provision for loan losses 90 0
Decrease (increase) in accrued interest receivable 150 (330)
Increase in other assets (310) (298)
Increase in other liabilities 1,013 880
Amortization of premium and accretion of
Discount on investment securities, net 167 179
- -------------------------------------------------------------------------------- ------------
Net cash provided by operating activities 5,207 4,642
- -------------------------------------------------------------------------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 56,230 9,284
Proceeds from maturities of securities held-to-maturity 47,875 32,871
Purchase of securities available-for-sale (50,923) (43,183)
Purchase of securities held-to-maturity (48,814) (39,027)
Net increase in loans (10,463) (9,055)
Property and equipment expenditures, net (903) (124)
- -------------------------------------------------------------------------------- ------------
Net cash used in investing activities (6,998) (49,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (58,763) 2,525
Dividends paid (1,485) (1,390)
Proceeds from issuance of common stock 459 209
Net increase in short term borrowing 47,961 16,000
- -------------------------------------------------------------------------------- ------------
Net cash (used in) provided by financing activities (11,828) 17,344
- -------------------------------------------------------------------------------- ------------
Net decrease in cash and cash equivalents (13,619) (27,248)
- -------------------------------------------------------------------------------- ------------
Cash and cash equivalents at beginning of period 26,110 43,061
- -------------------------------------------------------------------------------- ------------
Cash and cash equivalents at end of period $ 12,491 $ 15,813
- -------------------------------------------------------------------------------- ------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings: $ 10,470 $ 10,772
Income taxes $ 1,452 $ 502
</TABLE>
See Accompanying Notes To Consolidated Financial Statements
5
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp Inc., (the Corporation)
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly owned subsidiary, Union Center National Bank (the Bank). All
significant intercompany accounts and transactions have been eliminated from the
accompanying consolidated financial statements.
BUSINESS
The Bank provides a full range of banking services to individual and corporate
customers through branch locations in Union and Morris Counties, New Jersey. The
Bank is subject to competition from other financial institutions and is subject
to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statement of condition and revenues and expenses for the applicable period.
Actual results could differ significantly from those estimates.
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 distributed May 29, 1998 to stockholders of record on May 1,
1998. Also reflected and restated for all prior periods is the 5% stock dividend
distributed on May 31, 1997. Results for the period ended September 30, 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 PRONOUNCEMENTS
SFAS No. 130
FASB Statement No. 130, "Reporting Comprehensive Income" (Statement 130)
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. Statement 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
6
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
(in thousands) 1998 1997 1998 1997
Comprehensive Income ---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 979 $ 916 $3,068 $3,102
Other comprehensive income
Unrealized holding gains arising
during the period, net of taxes 373 164 1,169 302
- -------------------------------------------------------------------------------------------------------------------
Total comprehensive income $1,352 $1,080 $4,237 $3,404
===================================================================================================================
</TABLE>
SFAS No. 132
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits". This Statement standardizes the
disclosure requirements for pensions and other post retirement 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 not readily available.
SFAS No. 133
In June 1998, the FASB adopted a New Statement of Accounting Standards, SFAS No.
133, "Accounting for Derivatives and Similar Financial Instruments and for
Hedging Activities." This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
This Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
Statement. Earlier application of all of the provisions of this Statement is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this Statement. This Statement should not be
applied retroactively to financial statements of prior periods. The adoption of
this statement by the Corporation is not expected to have a material effect on
the financial statements of the Corporation.
7
<PAGE>
SFAS No. 134
On October 9, 1998 the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". SFAS No. 134 changes the way mortgage banking
firms account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. This statement is effective
for fiscal quarters beginning after December 15, 1998. Early application is
permitted. The adoption of this statement by the Corporation is not expected to
have a material effect on the financial statements of the Corporation.
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income for the three months ended September 30, 1998 amounted to $979,000 as
compared to $916,000 earned for the comparable three month period ended
September 30, 1997. On a per diluted share basis, earnings increased to $.27 per
share as compared with $.26 per share for the three months ended September 30,
1997. The annualized return on average assets was .82 percent compared with .75
percent for the comparable three month period in 1997. The annualized return on
average stockholders' equity was 10.9 percent for the three month period ended
September 30, 1998 as compared to 11.4 percent for the comparable three months
ended September 30, 1997. Earnings performance for the third quarter of 1998
primarily reflects an increase in net interest income and non interest income
offset by higher operating expenses.
Net income and earnings per diluted share decreased $34,000 and 2.3 percent
respectively for the first nine months of 1998 compared to the first nine months
of 1997. Net income for the nine months ended September 30, 1998 was $3,068,000
as compared to $3,102,000 earned for the comparable nine month period of 1997.
On a per diluted share basis, earnings were $.85 as compared to $.87 per share
for the nine months ended September 30, 1997. The annualized return on average
assets was .86 percent for the nine months ended September 30, 1998 as compared
with .86 percent for the comparable period in 1997, while the annualized return
on average stockholders' equity was 11.7 percent and 13.2 percent, respectively.
Earnings performance for the nine months ended September 30, 1998, reflected
increased net interest income and other income offset by increases in
non-interest expense and income tax expense. All share and per share amounts
have been restated to reflect the 3 for 2 stock split distributed in May of 1998
and the 5% stock dividend distributed on May 18, 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
<TABLE>
<CAPTION>
===================================================================================================
(dollars in thousands) Three months ended Nine months ended
September 30, September 30,
Percent Percent
1998 1997 Change 1998 1997 Change
------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments $ 4,866 $ 5,260 (7.49) $ 14,462 $ 15,197 (4.84)
Loans, including fees 2,738 2,492 9.87 8,108 7,345 10.39
Federal funds sold 154 147 4.76 440 455 (3.30)
------- -------- -------- --------
Total interest income 7,758 7,899 (1.79) 23,010 22,997 0.06
- -------------------------------------------- -------- -------- --------
Interest expense:
Certificates $100,000 or more 995 1,575 (36.83) 3,622 4,340 (16.54)
Deposits 2,040 2,043 (0.15) 5,979 6,068 (1.47)
Short-term borrowings 371 194 91.24 847 489 73.21
------- -------- -------- --------
Total interest expense 3,406 3,812 (10.65) 10,448 10,897 (4.12)
- -------------------------------------------- -------- -------- --------
Net interest income* 4,352 4,087 6.48 12,562 12,100 3.82
- -------------------------------------------- -------- -------- --------
Tax-equivalent adjustment 86 117 (26.50) 275 375 (26.67)
Net interest income on a
fully Tax-equivalent basis $ 4,438 $ 4,204 5.57 $ 12,837 $ 12,475 2.90
- ------------------------------------------- -------- -------- --------
</TABLE>
*Before the provision for loan losses. NOTE: The tax-equivalent adjustment was
computed based on an assumed statutory Federal income tax rate of 34 percent.
Adjustments were made for interest accrued on securities of state and political
subdivisions.
8
<PAGE>
Net interest income on a fully tax-equivalent basis increased $234,000 or 5.6
percent to approximately $4.4 million for the three months ended September 30,
1998, from $4.2 million for the comparable period in 1997. For the three months
ended September 30, 1998, the net interest margin increased to 3.97 percent from
3.69 percent due to a more favorable mix of interest-bearing liabilities and the
decreased cost of funds reflecting the downward pressure, in general, on
short-term interest rates. For the three months ended September 30, 1998, a
decrease in the average yield on interest-earning assets of two basis points was
offset by a decrease in the average cost of interest-bearing liabilities of 25
basis points, resulting in the increase in the net interest margin. The increase
in net interest spreads is primarily a result of the decreased cost of
interest-bearing liabilities and the Corporation's ability to fund a greater
portion of its earning assets through increases in short-term borrowings,
non-interest-bearing sources and core deposits, versus higher cost time deposits
of $100,000 or more. Average earning assets decreased by $8.1 million, from the
comparable three month period in 1997. The net decrease in average
interest-bearing liabilities was $17.3 million over the comparable three month
period in 1997. The 1998 third quarter changes in average volumes were primarily
due to increased volumes of loans and corresponding decreases of investment
securities and interest-bearing liabilities
Net interest income on a fully tax-equivalent basis for the nine months ended
September 30, 1998 increased $362,000 or 2.9 percent, to approximately $12.8
million from the comparable nine month period in 1997. The Corporation's net
interest margin in 1998 increased to 3.84 percent from 3.73 percent due to a
decreased cost of funds reflecting the downward pressure, in general, on
short-term interest rates as the yield curve continued to flatten. For the nine
months ended September 30, 1998 earning assets increased by $646,000 on average
as compared with the nine months ended September 30, 1997. The decrease in the
average cost of interest-bearing liabilities accounted for the increase in the
net interest margin.
For the three month period ended September 30, 1998 interest income on a fully
tax-equivalent basis declined by $172,000 or 2.2 percent from the comparable
three month period in 1997. The primary factor contributing to the decrease was
the previously cited decrease in average earning assets. The Corporation's loan
portfolio increased on average $15.1 million to $140.4 million from $125.3
million in the same quarter in 1997, primarily driven by growth in commercial
loans, commercial and residential mortgages and home equity lines of credit.
This growth was funded through a decrease in the investment portfolio. The loan
portfolio (traditionally the Corporations highest yielding earning asset)
represented approximately 31.4 percent of the Corporation's interest-earning
assets (on average) during the third quarter of 1998 and 27.5 percent in 1997.
Interest income for the nine month period ended September 30, 1998 decreased by
approximately $87,000 or .37 percent, on a fully tax-equivalent basis as
compared to the comparable period ended September 30, 1997. The Corporation's
average loan portfolio increased $13.9 million to $137.3 million from $123.4
million in the comparable period of 1997. This growth was primarily driven by
growth in commercial loans, commercial and residential mortgages, and home
equity lines of credit. This growth was funded by a decrease in the investment
portfolio. The loan portfolio represented approximately 30.7 percent of the
Corporation's interest-earning assets (on average) for the nine months ended
September 30, 1998 as compared with 27.7 percent for the comparable period in
1997.
Investments accounted for the most significant change in the earning asset mix
for both the three month and nine month periods ended September 30, 1998.
Average investment volume decreased both for the three and nine months periods
in 1998 when compared to 1997. For the three months ended September 30, 1998
investments decreased $23.7 million to $296.0 million. For the nine months ended
September 30, 1998, the decrease amounted to $12.6 million compared to the
average investments for the comparable nine month period of 1997. The decrease
for both periods was primarily attributable to the accelerated prepayment of
principal during the second and third quarters of 1998 on outstanding mortgage
backed securities coupled with payments on callable securities. The flatness of
the yield curve during the third quarter and for the nine months of 1998 limited
reinvestment opportunities with sufficient spread to the Corporation, therefore,
funds were deployed in higher yielding loans. For the three and nine month
periods ended September 30, 1998 interest income attributable to the decrease in
investment volumes amounted to $401,000 and $641,000 respectively when compared
to similar 1997 periods.
Interest expense for the three months ended September 30, 1998, decreased
$406,000 or 10.7 percent from the comparable three month period ended September
30, 1997, as a result of the decline in deposit volumes, coupled with the
changes in deposit mix and higher amounts of lower cost short-term borrowings.
Lower interest rates brought about by the flattening of the yield curve
contributed significantly to the overall decrease in interest expense, as
compared with the three months ended September 30, 1997.
9
<PAGE>
For the nine months ended September 30, 1998, interest expense decreased
$449,000 or 4.1 percent as compared with the comparable nine month period in
1997. Interest expense for the nine months ended September 30, 1998 decreased as
a result of the decrease in deposit volumes and interest rates which had a
favorable impact on the cost of funds in the short-term market. The amount of
the decrease attributable to volume factors was $299,000 while $150,000 was due
to rate. This downward pressure on interest rates was heightened by the Federal
Reserve's action on September 30, 1998 lowering the federal funds index target
to 5.25 percent from the previous targeted level of 5.5 percent. The Federal
Reserve Board, again lowered the federal funds target rate to 5.00 on October
15, 1998.
Concerns about deflation leading to recession coupled with uncertain prospects
for continued economic growth in the United States as well as several foreign
economies have sent interest rates into a tailspin in all sectors of the yield
curve. This in turn has had a positive affect on the Corporation's ability to
lower core banking deposit rates and has affected the cost of funds associated
with a number of funding products i.e. municipal deposits tied to market
indices, "Jumbo" certificates of deposit, and short term borrowings (primarily
repurchase agreements). Management believes that the trend toward lower interest
rates and the flatness of the yield curve will continue to exert downward
pressure on the cost of funds and yields on earning assets throughout the
remainder of 1998 and into 1999. The Corporation's deposit mix during the first
nine months of 1998 continued to be impacted by the depositor's desire for
higher-yielding investment alternatives. Depositors have continued to shift
funds from lower-yielding savings and demand deposit type accounts into
higher-yielding money market accounts, certificates of deposit and sweep
accounts.
For the three months ended September 30, 1998, the Corporation's net interest
spread on a tax-equivalent basis increased to 3.27 percent from 3.04 percent for
the three months ended September 30, 1997. This increase reflected a widening of
spreads between yields earned on loans and investments and rates paid for
supporting funds. There was a favorable change in the mix of supporting
interest-earning assets, primarily the increased loan volumes but the yield on
interest-earning assets declined to 7.02 percent from 7.04 percent. However,
this was offset by the change in the mix of interest-bearing liabilities to less
costly funding. The yield on total interest-bearing liabilities decreased to
3.75 percent for the three months ended September 30, 1998 from 4.00 percent for
the three months ended September 30, 1997.
For the nine months ended September 30, 1998, the Corporation's net interest
spread on a tax-equivalent basis increased modestly to 3.13 percent from 3.12
percent for the nine months ended September 30, 1997. This increase reflected a
narrowing of margins due to the previously discussed pressure on rates at the
short-end of the yield curve during the first and second quarters and a widening
during the third quarter. The decrease in funding costs continued to change
disproportionately during the third quarter of 1998 compared to the rates on new
loans and investments. This is reflected in the decrease in the average volume
of time certificates greater than $100,000 in proportion to fund assets.
The contribution of non-interest-bearing sources (i.e. the differential between
the average rate paid on all sources of funds and the average rate paid on
interest-bearing sources) widened to approximately 71 from 61 basis points
during the nine month periods ended September 30, 1998 and 1997, respectively,
and 70 and 65 basis points for the respective three month periods ended
September 30, 1998 and 1997.
Investments
For the three months ended September 30, 1998, the average volume of investment
securities decreased to $296.0 million or a decrease of $23.7 million from
$319.8 million on average for the same three month period in 1997. The
tax-equivalent yield on the investment portfolio declined to 6.69 percent from
6.72 percent for the comparable three month period in 1997. Purchases made to
replace maturing and called investments were not made at comparable rates and in
some cases the monies were not invested in the Investment Portfolio.
For the nine months ended September 30, 1998, the average volume of investment
securities decreased by $12.6 million when compared to the same period in 1997.
The tax-equivalent yield on investments decreased to 6.57 percent or 11 basis
points from a yield of 6.68 percent for the nine month period ended September
30, 1997. The decreased yield on the investment portfolio during the first nine
months of 1998 resulted from the Corporation's inability to obtain comparable or
higher rates on purchases made to replace, in some cases, higher yielding
investments which had matured, were prepaid, or were called.
The impact of repricing activity on yields was lessened by a change in bond
segmentation and some extension, where risk is minimal within the portfolio of
investment maturities. This resulted in narrowed spreads and was compounded 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.
10
<PAGE>
For the nine months ended September 30, 1998, the total investment portfolio
excluding overnight investments, averaged $298.4 million, or 64.0 percent of
earning assets, as compared to $311.0 million or 69.8 percent at September 30,
1997. The principal components of the investment portfolio are U.S. Government
Treasury and Federal Agency callable and noncallable securities, including
agency issued Collateralized Mortgage Obligations.
At September 30, 1998 the net unrealized gain/loss carried as a component of
shareholders' equity amounted to a net unrealized gain of $1,761,000 as compared
with an unrealized gain of $592,000 at December 31, 1997 resulting from an
improvement in the bond market.
Bond prices rose as interest rates fell.
Loans
Loan growth during the first nine months of 1998 occurred in all segments of the
loan portfolio. This growth resulted from the Corporation's business development
efforts enhanced by the Corporation's marketing programs and new product lines.
The relative stability of the loan portfolio yield was the result of a stable
prime rate environment coupled with a competitive rate structure to attract new
loans. The Corporation's banking subsidiary, as part of its strategic plan to
increase its loan portfolios, decreased its prime lending rate to 8.00 percent
on September 29, 1998 well in advance of the industry. The result of increased
volume was lessened by continued re-financing activity and by the heightened
competition for borrowers that exists in the lending markets. The Corporation's
desire to grow this segment of the earning-asset mix is reflected in its current
business development plan and marketing plans, as well as its short-term
strategic plan.
Analyzing the loan portfolio for the nine months ended September 30, 1998,
average loan volume increased $13.8 million or 11.2 percent, while portfolio
yield remained relatively flat, declining by 5 basis points as compared with the
same period in 1997. The volume related factors contributed increased earnings
of $816,000 offset by a decline of $53,000 in the rate related change. The
increased total average loan volume was due to increased customer activity, new
lending relationships, and new loan products. For the three months ended
September 30, 1998, average loan volume increased $15.1 million, while the
portfolio yield declined 16 basis points as compared with the same period in
1997. The volume related factors contributed increased earnings of $296,000
offset by a decline of $50,000 due to rate related changes. Total average loan
volume increased to $140.4 million with a net interest yield of 7.80 percent, as
compared to $125.3 million with a yield of 7.96% for the three months ended
September 30, 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 September 30, 1998 the allowance was $1,357,000 as
compared to $1,269,000 on September 30, 1997. The provision for loan losses
during the nine and three month periods ended September 30, 1998 amounted to
$90,000 and $30,000, respectively. There was no provision for loan losses during
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 .95 percent and 1.00
percent at September 30, 1998, and 1997, respectively. In management's view the
level of the allowance at September 30, 1998 is adequate. 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 inadequate are the same factors that are analyzed by the Corporation is
establishing the amount of the allowance.
During the nine month period ended September 30, 1998, the Corporation did not
experience any substantial problems within its loan portfolio. Net charge-offs
were approximately $2,000. At September 30, 1998 the Corporation had non-accrual
loans amounting to $149,000 versus $27,000 in non-accrual loans at December 31,
1997. The Corporation continues to aggressively pursue collections of principal
and interest on loans previously charged-off.
11
<PAGE>
The Corporation defines impaired loans to consist of non-accrual loans and loans
internally classified as substandard or below, in each instance above an
established dollar threshold. All loans below the established dollar threshold
are considered homogenous and are collectively evaluated for impairment. The
Corporation did not have any impaired loans or required allocations to the
allowance for loan losses, as defined by SFAS 114 in either 1998 or 1997.
Allowance for loan losses
(in thousands)
- --------------------------------------------------------------------------------
Nine months ending September 30
-------------------------------
1998 1997
Average loans outstanding $137,258 $ 123,447
- --------------------------------------------------------------------------------
Total loans at end of period 142,885 126,861
- --------------------------------------------------------------------------------
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 9 29
- --------------------------------------------------------------------------------
Total charge-offs 9 30
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 7 6
- --------------------------------------------------------------------------------
Total recoveries 7 6
Net Charge-offs: 2 24
Provisions for loan losses 90 0
- --------------------------------------------------------------------------------
Balance at end of period $ 1,357 $ 1,269
================================================================================
Ratio of net charge-offs during the period to
Average loans outstanding during the period 0.00% 0.02%
- --------------------------------------------------------------------------------
Allowance for loan losses as a percentage of .95 1.00
total loans
- --------------------------------------------------------------------------------
Asset Quality
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
analysis of credit requests and ongoing examination of outstanding loans and
delinquencies, with particular attention to portfolio dynamics and mix. The
Corporation strives to identify loans experiencing difficulty early enough to
correct the problems, to record charge-offs promptly based on realistic
assessments of current collateral values, and to maintain an adequate allowance
for loan losses at all times. These practices have protected the Corporation
during economic downturns and periods of uncertainty.
It is generally the Corporation's policy to discontinue interest accruals once a
loan is past due as to interest/or principal payments for a period of ninety
days. When a loan is placed on non-accrual, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to the loan's yield.
At September 30, 1998 and December 31, 1997, the Corporation had no restructured
loans. Non-accrual loans amounted to $149,000 at September 30, 1998, and were
primarily comprised of first and second lien mortgages, as compared to $27,000
at December 31, 1997. Past due loans 90 days or more and still accruing amounted
to $86,000 as of September 30, 1998 and $73,000 as of December 31, 1997. Of the
non-accrual loan balances, respectively, in each period, $86,000 and $73,000
were comprised of student loans. On October 28, 1998 the Corporation charged-off
to the allowance for loan losses approximately $51,000 of such student loans
which were deemed uncollectible.
12
<PAGE>
The outstanding balances of accruing loans which are 90 days or more past due as
to principal or interest payments and non-performing assets at September 30,
1998 and December 31, 1997 were as follows:
- ------------------------------------------------ -------------------------------
Non-Performing Assets September 30, December 31,
(dollars in thousands) 1998 1997
================================================================================
Loans past due 90 days and still accruing $ 86 $ 73
Non-accrual loans 149 27
- --------------------------------------------------------------------------------
Total non-performing assets $235 $100
================================================================================
At September 30, 1998, Nonperforming Assets, consisting of loans on nonaccrual
status plus other real estate owned acquired through foreclosure (OREO),
amounted to $149,000 or .10 percent of total loans outstanding as compared to
$27,000 or .02 percent at December 31, 1997. During October 1998 a mortgage loan
in the amount of $100,000 was restored to accrual status.
The Corporation did not have any other real estate owned (OREO) at September 30,
1998 or at December 31, 1997.
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three and nine month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
1998 1997 % change 1998 1997 % change
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and fees $ 188 $ 166 13.25 $ 536 $ 441 21.54
Other income. 74 27 174.07 155 97 59.79
----- ----- ----- -----
Total other income $ 262 $ 193 35.75 $ 691 $ 538 28.44
======================================= ===== ===== ===== =====
</TABLE>
For the three months ended September 30, 1998, total other (non-interest)
income, increased $69,000 or 35.8 percent as compared to the three months ended
September 30, 1997. The increase in other income is primarily due higher ATM
surcharges, letter of credit income and gains on mortgage loan sales.
For the nine month period ended September 30, 1998, total other (non-interest)
income, reflects an increase of $153,000 or 28.4 percent compared with the
comparable nine month period ended September 30, 1997. This overall increase was
primarily a result of increased service charges, commissions, and fees coupled
with the implementation of ATM surcharging which amounted to $155,000 for the
nine month period ended September 30, 1998, as compared to $32,000 in 1997.
Service charge fees on deposits decreased primarily as a result of a decrease in
business activity.
Other Non-Interest Expense
The following table presents the principal categories of non-interest expense
for the three and nine month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands) Three months ended Nine months ended
September 30, September 30,
Other expense: 1998 1997 % change 998 1997 % change
-------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $1,534 $1,545 (0.71) $4,300 $4,227 1.73
Occupancy expense, net 285 243 17.20 805 763 5.50
Premises & equipment expense 317 343 (7.58) 871 992 (12.20)
Stationery and printing expense 130 73 78.08 317 269 17.84
Marketing & Advertising 161 74 117.57 363 282 28.72
Other expenses 674 594 13.47 1,865 1,526 22.21
-------- -------- ---------- --------
Total other expense $3,101 $2,872 7.97 $ 8,521 $8,059 5.73
============================================== ======== ========== =======
</TABLE>
13
<PAGE>
For the three month period ended September 30, 1998 total other (non-interest)
expenses increased $229,000 or approximately 8.0 percent over the comparable
three month period ended September 30, 1997. Occupancy expenses coupled with
increases in stationery and printing, marketing and advertising and other
expenses comprised the primary components of the total increase for the three
month period ended September 30, 1998. Prudent management of other expenses has
been a key objective of management in an effort to improve earnings efficiency.
The Corporation's efficiency ratio (other expenses less non recurring expenses
as a percentage of net interest income on a tax-equivalent basis plus
non-interest income) for the nine months ended September 30, 1998 was 63.0
percent as compared with 61.9 percent at September 30, 1997. For the three
months ended September 30, 1998 this ratio was 66.0 percent as compared with
65.3 percent for the comparable period ended September 30, 1997.
For the nine month period ended September 30, 1998, total other (non-interest)
expenses increased $462,000 or 5.7 percent over the comparable period ended
September 30, 1997. This was due to continued expansion of the Bank's branch
network coupled with the expense of on-going technological and automation
programs. Salaries and employee benefits costs coupled with occupancy,
stationery and printing, marketing, and advertising, and other expenses (FDIC
insurance, computer related and correspondent bank charges, examination and
miscellaneous expense) comprised the primary components of the total increase
for the period.
The increase in occupancy expenses reflect the associated costs of the
Corporation's expanded facilities. For the three and nine months ended September
30, 1998, occupancy expenses increased $42,000 over the comparable periods in
1997 primarily related to our new Morristown banking center opened in August
1998, and rental increases on other leased locations.
Marketing and advertising expenditure increased for both the three month and
nine month periods ended September 30, 1998 by $87,000 and $81,000 respectively
compared to the comparable period in 1997. The increase in this expense category
is primarily attributable to the grand opening expenses associated with our
Morristown banking center and the seventy fifth anniversary celebration of the
Corporation's banking subsidiary.
Provision for Income Taxes
The effective tax rate for the three month period ended September 30, 1998 was
34.0 percent as compared to 34.9 percent for the three months ended September
30, 1997. For the nine month period ended September 30, 1998, the effective tax
rate was 33.9 percent compared to 32.2 percent for the nine month period ended
September 30, 1997. The Corporation's provision for income taxes increased for
both the three and nine months from 1997 to 1998 primarily as a result of a
reduction of tax-exempt income.
Asset Liability Management
The composition and mix of the Corporation's assets and liabilities is planned
and monitored by the Asset and Liability Committee (ALCO). Asset and Liability
management encompasses the control of interest rate risk (interest sensitivity
management) and the ongoing maintenance and planning of liquidity and capital.
In general, management's objective is to optimize net interest income and
minimize interest rate risk by monitoring these components of the statement of
condition.
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.
14
<PAGE>
The Corporation's rate sensitivity position in each time frame may be expressed
as assets less liabilities, as liabilities less assets, or as the ratio between
rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a
short funded position (liabilities repricing before assets) would be expressed
as a net negative position, when period gaps are computed by subtracting
repricing liabilities from repricing assets. When using the ratio method, a
RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1
indicates an asset sensitive position, and a ratio of less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio of less than 1 tends to expand
net interest margins in a falling rate environment and to reduce net interest
margins in a rising rate environment. Conversely, when a positive gap occurs,
generally margins expand in a rising rate environment and contract in a falling
rate environment. From time to time, the Corporation may elect to deliberately
mismatch liabilities and assets in a strategic gap position.
At September 30, 1998, the Corporation reflected a negative interest sensitivity
gap (or an interest sensitivity ratio) of .44:1.0 at the cumulative one year
position. During much of 1998 the Corporation had a negative interest
sensitivity gap. The maintenance of a liability-sensitive position during 1998
had a favorable 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 wider net interest spread during the remainder of 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
cashflows, and adjusts positions as necessary to maintain adequate levels of
liquidity. By using a variety of potential funding sources and staggering
maturities, the risk of potential funding pressure is significantly reduced.
Management also maintains a detailed liquidity contingency plan designed to
adequately respond to situations which could lead to liquidity concerns.
Anticipated cash-flows at September 30, 1998, projected to September of 1999,
indicates that the Bank's liquidity should remain strong, with an approximate
projection of $107.3 million in anticipated cashflows over the next twelve
months. This projection represents a forward-looking statement under the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from this projection depending upon a number of factors, including the liquidity
needs of the Bank's customers, the availability of sources of liquidity and
general economic conditions.
The Corporation derives a significant proportion of its liquidity from its core
deposit base. For the nine month period ended September 30, 1998, average core
deposits (comprised of total demand, savings accounts and money market accounts
under $100,000) represented 55.1 percent of total deposits as compared with 50.3
percent at September 30, 1997. More volatile rate sensitive deposits,
concentrated in time certificates of deposit greater than $100,000 for the nine
month period ended September 30, 1998, decreased to 39.2 percent on average of
total deposits from 39.5 percent during the nine months ended September 30,
1997. This change has resulted from a $16.5 million decrease in time deposits on
average for the nine months ended September 30, 1998 compared to the prior year
period.
The decrease in average funding sources during the nine months ended September
30, 1998 resulted primarily from a decrease in business and public fund
deposits. The decline was primarily concentrated in certificates of deposit of
$100,000. This was offset by an increase of $12.2 million (on average) in
Federal funds purchased and securities sold under agreement to repurchase.
Non-interest bearing funding sources as a percentage of the total funding mix
increased to 16.5 percent (on average) as compared to 15.9 percent for the nine
month period ended September 30, 1997.
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, advances from the Federal Home Loan Bank and Federal funds
purchased. Average short-term borrowings during the first nine months of 1998
were $23.9 million, an increase of $12.2 million or 104.3 percent from $11.7
million in average short-term borrowings during the comparable nine months ended
September 30, 1997. This change was due to a strategic shift from jumbo
certificates of deposit to more cost effective funding from the Federal Home
Loan Bank.
15
<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 nine
months ended September 30, 1998, cash and cash equivalents (which decreased
overall by $13.6 million) were provided (on a net basis) by the $5.2 million in
cash flow from operating activities. A total of $7.0 million was used in net
investing activities, principally a $10.6 million increase in loans. A total of
$11.8 million was used in financing activities primarily due to a decrease in
jumbo certificates of deposit.
Shareholder's Equity
Total shareholders' equity averaged $35.0 million or 7.37 percent of average
assets for the nine month period ended September 30, 1998, as compared to $31.4
million, or 6.54 percent, during the same period in 1997. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $459,000 in
new capital for the nine months ended September 30, 1998 as compared with
$209,000 for the comparable period in 1997. Tangible book value per common
share, after the 5% stock dividend paid May 31, 1997 and the 3-for-2 stock split
paid May 1998, was $9.37 at September 30, 1998 as compared to $8.48 at December
31, 1997. Tangible book value per common share was $8.19 at September 30, 1997,
as adjusted for the above noted stock split and 5% stock dividend.
Capital
The maintenance of a solid capital foundation continues to be a primary goal for
the Corporation. Accordingly, capital plans and dividend policies are monitored
on an ongoing basis. The most important objective of the capital planning
process is to balance effectively the retention of capital to support future
growth and the goal of providing stockholders with an attractive long-term
return on their investment.
Risk-Based Capital/Leverage
Banking regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at September 30, 1998, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.00% and 8.00%, respectively.
At September 30, 1998, total Tier l capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $31.7
million or 6.80 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $1,761,000 of net unrealized gain, after tax, on
securities available-for-sale (included as a component of stockholders' equity)
and goodwill of approximately $3.1 million as of September 30, 1998.
At September 30, 1998, the Corporation's estimated Tier I risk-based and total
risk-based capital ratios were 15.3 percent and 15.9 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of September 30, 1998.
Under its prompt corrective action regulations, bank regulators are required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of financial
institutions into five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators about capital
components, risk weightings and other factors.
As of September 30, 1998, management believes that the Bank meets all capital
adequacy requirements to which it is subject.
16
<PAGE>
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 and risk 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 designed to ensure that all
information technology, including software and hardware, used in connection with
the Corporation's business will handle date related data in a manner which will
provide accurate results. 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.
As of September 1998, management has completed several phases of the plan,
including identification, modification , and preliminary 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, total costs to the Corporation of achieving Year 2000
compliance are estimated at $300,000. However, management believes that such
costs may rise if and when additional issues arise that may require additional
expenditures to make the Corporation Year 2000 compliant. In addition management
has begun an evaluation process necessary to formulate a comprehensive
contingency plan. As part of the contingency planning, the Corporation will
implement a due diligence process that identifies significant customers, and
third parties posing material Year 2000 risks, evaluates their Year 2000
preparedness, assesses their Year 2000 risk and implements appropriate risk
controls. It is expected that the contingency planing process will be completed
during the fourth quarter of 1998. 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.
The Corporation believes that its Year 2000 project will allow it to be Year
2000 compliant in a timely manner. There can be no assurances, however, that the
Corporation's information technology systems or those of a third party on which
the Corporation relies will be Year 2000 compliant by year 2000 or that the
Corporation's contingency plans will mitigate the effects of any noncompliance.
An interruption of the Corporation's ability to conduct its business due to a
Year 2000 readiness problem could have a material adverse effect on the
Corporation's business operations or financial condition.
17
<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
None
Item 6 Exhibits and Reports on Form 8-K
A) Exhibits: Exhibit (27-1) - Center Bancorp Inc. Financial Data Schedule -
September 30, 1998
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 1998.
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: November 13, 1998 /s/ Anthony C. Weagley
--------------------------------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,491
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 113,474
<INVESTMENTS-CARRYING> 181,459
<INVESTMENTS-MARKET> 185,170
<LOANS> 142,885
<ALLOWANCE> (1,357)
<TOTAL-ASSETS> 466,533
<DEPOSITS> 377,247
<SHORT-TERM> 48,661
<LIABILITIES-OTHER> 3,993
<LONG-TERM> 0
0
0
<COMMON> 7,543
<OTHER-SE> 29,089
<TOTAL-LIABILITIES-AND-EQUITY> 466,533
<INTEREST-LOAN> 8,108
<INTEREST-INVEST> 14,462
<INTEREST-OTHER> 440
<INTEREST-TOTAL> 23,010
<INTEREST-DEPOSIT> 9,601
<INTEREST-EXPENSE> 10,448
<INTEREST-INCOME-NET> 12,562
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,521
<INCOME-PRETAX> 4,642
<INCOME-PRE-EXTRAORDINARY> 4,642
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,068
<EPS-PRIMARY> .86
<EPS-DILUTED> .85
<YIELD-ACTUAL> 6.96
<LOANS-NON> 149
<LOANS-PAST> 86
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,269
<CHARGE-OFFS> 9
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 1,357
<ALLOWANCE-DOMESTIC> 974
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 383
</TABLE>
