CENTER BANCORP INC
10-Q, 1998-08-14
STATE COMMERCIAL BANKS
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<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 June 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 June 30, 1998
- --------------------------------------------
Common stock no par value - 3,558,979 shares


<PAGE>




                               CENTER BANCORP INC.

                               INDEX TO FORM 10-Q




PART I.  FINANCIAL INFORMATION                                           PAGE

         Item I.  Financial Statements
                  Consolidated Statements of  Condition
                  at June 30, 1998 (Unaudited) and December 31, 1997        3

                  Consolidated Statements of Income for the
                  Three and Six Months Ended June 30, 1998 and 1997
                  (Unaudited)                                               4

                  Consolidated Statements of Cash Flows for the
                  Six Months Ended June 30, 1998 and 1997
                  (Unaudited)                                               5

                  Notes to the Consolidated Financial Statements            6-7

         Item 2.  Management's Discussion and Analysis of
                  Financial Condition and Results of Operations             8-18

PART II.  OTHER INFORMATION

         Item 1.  Legal Proceedings                                         19

         Item 2.  Changes in Securities                                     19

         Item 4.  Submission of Matters to a Vote of Security Holders       19

         Item 6.  Exhibits                                                  19

                  Signature                                                 20

                  Exhibit Index                                             21


<PAGE>

Center Bancorp Inc.
Consolidated Statements of Condition
<TABLE>
<CAPTION>
                                                                               June 30,            December 31,
(Dollars in thousands)                                                           1998                  1997
                                                                             -----------          -------------
                                                                                       (unaudited)
Assets:
<S>                                                                           <C>                  <C>       
  Cash and due from banks                                                     $   14,517           $   15,210
  Federal funds sold                                                               1,200               10,900
  Securities purchased under agreement to resell                                  18,100                    0
                                                                              ----------           ----------
      Total cash and cash equivalents                                             33,817               26,110
                                                                              ----------           ----------

  Investment securities held to maturity (approximate
     market value of $183,197 in 1998 and $198,960 in 1997)                      186,432              196,980
  Investment securities available for sale                                       112,378              101,318
                                                                              ----------           ----------
      Total investment securities                                                298,810              298,298
                                                                              ----------           ----------

  Loans, net of unearned income                                                  139,524              132,424
    Less - Allowance for loan losses                                               1,327                1,269
                                                                              ----------           ----------
        Net loans                                                                138,197              131,155
                                                                              ----------           ----------
  Premises and equipment, net                                                      8,952                9,130
  Accrued interest receivable                                                      4,483                4,350
  Other assets                                                                       850                  687
  Goodwill                                                                         3,220                3,382
                                                                              ----------           ----------
        Total assets                                                          $  488,329           $  473,112
                                                                              ----------           ----------

Liabilities
  Deposits:
    Non-interest bearing                                                      $   79,512           $   77,821
    Interest bearing:
      Certificates of deposit $100,000 and over                                   95,050              116,746
      Savings and time deposits                                                  247,511              241,443
                                                                              ----------           ----------
        Total deposits                                                           422,073              436,010
  Federal funds purchased and securities sold under
    agreements to repurchase                                                      27,959                  700
  Accounts payable and accrued liabilities                                         3,270                2,980
                                                                              ----------           ----------
        Total liabilities                                                        453,302              439,690

Stockholders' equity
  Common stock, no par value:
    Authorized 20,000,000 shares; issued 4,021,495 and 4,012,372
    shares in 1998 and 1997, respectively                                          7,461                7,296
  Additional paid in capital                                                       3,577                3,513
  Retained earnings                                                               24,970               23,829
                                                                              ----------           ----------
                                                                                  36,008               34,638
  Less - Treasury stock at cost (462,516 shares in 1998 and 470,202                
     shares in 1997, respectively                                                  1,777                1,808
 Accumulated other comprehensive income                                              796                  592
                                                                              ----------           ----------
        Total stockholders' equity                                                35,027               33,422
                                                                              ----------           ----------
        Total liabilities and stockholders' equity                            $  488,329           $  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


<PAGE>




Center Bancorp Inc.
Consolidated Statements of Income
               (unaudited)
<TABLE>
<CAPTION>

                                                              Three Months Ended             Six Months Ended
                                                                   June 30,                      June 30,
                                                          ---------------------------   ---------------------------

(in thousands, except per share data)                     1998             1997            1998             1997
                                                      ----------       ----------       ----------       ----------
<S>                                                       <C>              <C>             <C>              <C> 
Interest income:
  Interest and fees on loans                          $    2,698       $    2,455       $    5,370       $    4,853
  Interest and dividends on investment
securities:
    Taxable interest income                                4,618            4,933            9,229            9,437
    Nontaxable interest income                               174              240              367              499
  Interest on Federal funds sold and securities
  purchased under agreement to resell                        237              108              286              309
                                                      ----------       ----------       ----------       ----------
        Total interest income                              7,727            7,736           15,252           15,098
                                                      ----------       ----------       ----------       ----------

Interest expense:
  Interest on certificates of deposit $100,000             1,316            1,495            2,627            2,765
or more
  Interest on other deposits                               1,938            2,013            3,939            4,025
  Interest on short-term borrowings                          323              188              476              295
                                                      ----------       ----------       ----------       ----------
        Total interest expense                             3,577            3,696            7,042            7,085
        Net interest income                                4,150            4,040            8,210            8,013
                                                      ----------       ----------       ----------       ----------
Provision for loan losses                                     30                0               60                0
Net interest income after provision for loan
         losses                                            4,120            4,040            8,150            8,013
                                                      ----------       ----------       ----------       ----------
Other income:
  Service charges, commissions and fees                      168              137              348              275
  Other income                                                38               39               81               70
                                                      ----------       ----------       ----------       ----------
        Total other income                                   206              176              429              345
                                                      ----------       ----------       ----------       ----------

Other expense:
  Salaries and employee benefits                           1,431            1,384            2,766            2,682
  Occupancy expense, net                                     258              242              520              520
  Premises and equipment expense                             283              321              554              649
  Stationary and printing expense                            146              120              187              196
  Marketing and advertising                                   93               81              202              208
  Other expenses                                             632              568            1,191              932
                                                      ----------       ----------       ----------       ----------
        Total other expense                                2,843            2,716            5,420            5,187
                                                      ----------       ----------       ----------       ----------
        Income before income tax expense                   1,483            1,500            3,159            3,171
Income tax expense                                           527              554            1,070              985
                                                      ----------       ----------       ----------       ----------
        Net income                                    $      956       $      946       $    2,089       $    2,186
                                                      ----------       ----------       ----------       ----------

Earnings per share                                    $                $                $                $
Basic                                                        .27              .27              .59              .62
Diluted                                                      .26              .26              .58              .61
                                                      ----------       ----------       ----------       ----------
Average weighted common shares outstanding
Basic                                                  3,558,008        3,533,811        3,553,345        3,529,212
Diluted                                                3,594,115        3,569,120        3,592,707        3,555,765
                                                      ----------       ----------       ----------       ----------
</TABLE>
All share and per 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


<PAGE>




Center Bancorp Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                           Six Months Ended
                                                                               June 30
                                                                  ---------------------------------
(Dollars in thousands)                                                  1998               1997
                                                                     --------             --------

<S>                                                                     <C>                <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                         $  2,089             $  2,186
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                                        677                  735
     Provision for Loan Losses                                             60                    0
     Increase in accrued interest receivable                             (133)                (408)
     Increase in other assets                                            (164)                (283)
     Increase in other liabilities                                        290                  556
     Amortization of premium and accretion of
      discount on investment securities, net                              143                  141
                                                                     --------             --------
        Net cash provided by operating activities                       2,962                2,927
                                                                     --------             --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from maturities of securities                               41,576                8,801
    available-for-sale
  Proceeds from maturities of securities held-to-maturity              23,489               17,265
  Purchase of securities available-for-sale                           (45,671)             (27,744)
  Purchase of securities held-to-maturity                             (19,724)             (36,011)
  Net increase in loans                                                (7,160)              (8,121)
  Property and equipment expenditures, net                               (338)                 (32)
                                                                     --------             --------
     Net cash used in investing
         activities                                                    (7,828)             (45,842)
                                                                     --------             --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                            (13,937)              (4,436)
  Dividends paid                                                         (947)                (919)
  Proceeds from issuance of common stock                                  198                  145
  Net increase in short-term borrowing                                 27,259               23,482
                                                                     --------             --------
        Net cash provided by financing activities                      12,573               18,272
                                                                     --------             --------

        Net increase (decrease) in cash and cash                        7,707              (24,643)
          equivalents
                                                                     --------             --------

Cash and cash equivalents at beginning of period                       26,110               43,061
                                                                     --------             --------
Cash and cash equivalents at end of period                           $ 33,817             $ 18,418
                                                                     --------             --------

Supplemental disclosures of cash flow information:
  Interest paid on deposits and short-term borrowings                $  7,041             $  7,007
  Income taxes                                                       $    304             $    353
</TABLE>





<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 June 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 STANDARDS

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.



<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                         Six Months
                                                      Ended June 30,                      Ended June 30,

(in thousands)                                       1998                1997            1998              1997
                                                     ----                ----            ----              ----
Comprehensive Income
- -----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>             <C>               <C> 
Net Income                                           $  956            $  946            $2,089            $2,186
Other comprehensive income
  Unrealized holding gains arising
    during the period, net of taxes                      69               543               204               138
                                                     ------            ------            ------            ------
Total comprehensive income                           $1,025            $1,489            $2,293            $2,324
                                                     ======            ======            ======            ======
</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 nor 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 a new 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.



<PAGE>



            Management's Discussion & Analysis of Financial Condition
                            and Results of Operations

Net income and earnings per share decreased for the first six months of 1998
compared to the first six months of 1997. Net income for the six months ended
June 30, 1998 was $2,089,000 as compared to $2,186,000 earned for the comparable
six month period of 1997. On a diluted per share basis, earnings were $0.58 as
compared to $0.61 per share for the six months ended June 30, 1997. The
annualized return on average assets was 0.88 percent for the six months ended
June 30, 1998 as compared with 0.92 percent for the comparable period in 1997,
while the annualized return on average stockholders' equity was 12.1 percent and
14.2 percent, respectively. Earnings performance for the six months ended June
30, 1998, reflected increased net interest income offset by increases in
non-interest expense and income tax expense. All share and per share amounts
have been restated to reflect the 3 for 2 stock split distributed in May of 1998
and the 5% stock dividend distributed on May 18, 1997.

Net income for the three months ended June 30, 1998 amounted to $956,000 as
compared to $946,000 for the comparable three month period ended June 30, 1997.
On a diluted per share basis, earnings were $0.26 and $0.26 per share for both
three month periods ended June 30, 1998 and 1997, while the annualized return on
average assets was 0.80 percent for the three months ended June 30, 1998
compared with 0.78 percent for the comparable three month period in 1997. The
annualized return on average stockholders' equity was 11.0 percent for the three
month period ended June 30, 1998 as compared to 12.2 percent for the comparable
three months ended June 30, 1997. Earnings performance for the second quarter of
1998 reflects an increase in net interest income and non-interest income
partially offset by an increase in non- interest expense.

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                          Six months ended
                                         June 30,                                   June 30,
                                                               Percent                                   Percent
                                      1998           1997       Change           1998           1997      Change
                                      ----           ----                        ----           ----      

<S>                                  <C>            <C>           <C>         <C>             <C>           <C>   
Interest income:                                                                            
 Investments                         $4,792         $5,173        (7.37)      $ 9,596         $ 9,936       (3.42)
 Loans, including fees                2,698          2,455         9.90         5,370           4,853       10.65
 Federal funds sold                     237            108       119.44           286             309       (7.44)
                                     ------         ------                    -------         -------             
   Total interest income              7,727          7,736         (.12)       15,252          15,098        1.02
                                     ------         ------                    -------         -------             
Interest expense:                                                                           
 Certificates $100,000 or             1,316          1,495       (11.97)        2,627           2,765       (4.99)
  more                                                                                        
 Deposits                             1,938          2,013        (3.73)        3,939           4,025       (2.14)
 Short-term borrowings                  323            188        71.81           476             295       61.36
                                     ------         ------                    -------         -------             
   Total interest expense             3,577          3,696        (3.22)        7,042           7,085       (0.61)
                                     ------         ------                    -------         -------             
   Net Interest  income *             4,150          4,040         2.72         8,210           8,013        2.46
                                     ------         ------                    -------         -------             
Tax-equivalent adjustment                99            124       (20.16)          189             257      (24.46)
Net interest income on a                                                                    
 fully tax-equivalent basis          $4,249         $4,164         2.04       $ 8,399         $ 8,270        1.56
                                     ------         ------                    -------         -------             
</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.



<PAGE>



Net interest income on a fully tax-equivalent basis for the six months ended
June 30, 1998 increased $129,000 or 1.56 percent, from approximately $8.3
million for the comparable six month period in 1997. The Corporation's gross
interest yield rose 1 basis point to 3.77 percent from 3.76 percent in 1997 due
to a 5 basis point decline in the average interest rates supporting earning
assets offset by a 4 basis point decline in the average yield on earning-assets
from 6.97 percent in 1997 to 6.93 percent for the six months in 1998. For the
six months ended June 30, 1998 earning-assets increased by $5.0 million on
average as compared with the six months ended June 30, 1997.

Net interest income on a fully tax-equivalent basis increased $85,000 or 2.04
percent to approximately $4.2 million for the three months ended June 30, 1998,
from approximately $4.1 million for the comparable period in 1997. The gross
interest yield increased to 3.76 percent from 3.71 percent due to an 11 basis
point decline in the average interest rates supporting earning-assets offset by
a 4 basis point decline in the yield on earning-assets from 7.00 percent in 1997
to 6.94 percent in 1998. Average earning-assets increased by $1.5 million, as
compared with the comparable three month period in 1997. The net decrease in
average interest-bearing liabilities was $9.8 million over the comparable three
month period in 1997. The 1998 second quarter changes in average volumes were
primarily due to increased volumes of loans and federal funds sold and
securities purchased under agreement to resell and funded by short-term
borrowings and cashflows from the investment portfolio.

Interest income for the six month period ended June 30, 1998 increased by
approximately $154,000 or 1.02 percent, versus the comparable period ended June
30, 1997. The primary factor contributing to the increase was the previously
cited changes in the mix and growth of average earning-assets, primarily loans.
The Corporation's loan portfolio increased on average $13.1 million to $135.6
million from $122.5 million in the same period of 1997. This growth was
primarily driven by growth in commercial loans, commercial mortgages, and home
equity lines of credit. This growth was funded by increased short term borrowing
and cashflows from the investment portfolio. The loan portfolio (traditionally
the Corporation's highest yielding earning asset) represented approximately 30
percent of the Corporation's interest earning-assets (on average) for the six
months ended June 30, 1998 as compared with 28 percent for the comparable period
in 1997.

For the three month period ended June 30, 1998 interest income decreased by
$34,000 or 0.43 percent over the comparable three month period in 1997 on fully
tax-equivalent basis. The primary factor contributing to the decrease was a
lower level of tax-exempt interest income. The Corporation's loan portfolio
increased on average $12.6 million to $136.6 million from $124.0 million in the
same quarter in 1997, primarily driven by growth in commercial loans, commercial
mortgages and home equity lines of credit. This growth was funded through cash
flows from the investment portfolio and short term borrowings . The loan
portfolio represented approximately 30 percent of the Corporation's
interest-earning-assets (on average) during the second quarter of 1998 and 28
percent in the same quarter 1997. Interest income generated from the loan
portfolio during the three months ended June 30, 1998 was driven by continued
loan demand.

Investments accounted for the most significant change in the earning-asset mix
for both the six and three month periods ended June 30, 1998. Average investment
volume decreased both for the six and three month periods in 1998 compared to
1997. For the six months ended June 30, 1998 investments decreased $6.9 million
to $299.7 million. For the three months ended June 30, the decrease amounted to
$14.9 million compared to the average investments for the second quarter of
1997. The decrease for both periods is attributable to the flatness of the yield
curve as well as accelerated prepayment of principal during the second quarter
of 1998 on outstanding mortgage backed securities. The flatness of the yield
curve limited investment opportunities with sufficient spread to the
Corporation, thereby curtailing reinvestment.

Interest expense for the six months ended June 30, 1998 decreased as a result of
a more favorable mix of deposits and lower cost short-term borrowings. For the
six months ended June 30, 1998, interest expense decreased $43,000 or 0.61
percent as compared with the comparable six month period in 1997.

Interest expense for the three months ended June 30, 1998 decreased as a result
of the continued growth in short-term borrowings, coupled with the changes in
deposit mix.

<PAGE>



Inflationary concerns and uncertain prospects for continued economic growth have
kept short-term interest rates unchanged at current levels, while the long and
intermediate sectors of the curve have continued to flatten. There continues to
be a disparity of rates in the short-term interest rate market versus that of
core banking deposit rates. 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 keeping them higher to meet the short end of
the yield curve. Management believes that this pressure and continued flatness
of the yield curve will continue to exert upward pressure on the cost of funds
throughout 1998. Deposit growth during the first and second quarter of 1998
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. Depositors have continued to shift funds from
lower yielding savings and money market accounts into higher yielding
certificates of deposit. Furthermore, the impact of this volume change in the
deposit mix, coupled with the increased deposit volume indexed to this end of
the curve, continued to be a major factor in the net change in the mix of funds,
during 1998 as compared with 1997.

For the six months ended June 30, 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) declined to 3.06 percent from 3.16
percent for the six months ended June 30, 1997. This decline reflected a
narrowing of margins due to the previously discussed pressure on rates at the
short-end of the yield curve. The increase in these funding costs continues to
change disproportionately to the rates on new loans and investments. The yield
on interest-earning assets for the six months ended June 30, 1998, declined to
6.93 percent from 6.97 percent in 1997. The average rate paid on
interest-bearing liabilities increased to 3.87 percent from 3.81 percent in
1997.

For the three months ended June 30, 1998, the Corporation's net interest yield
on a tax-equivalent basis declined to 3.06 percent from 3.10 percent for the
three months ended June 30, 1997. This decline reflected a narrowing of spreads
between yields earned on loans and investments and rates paid for supporting
funds. The yield on interest-earning assets for the three months ended June 30,
1998 declined to 6.94 percent from 7.00 percent in 1997. The average rates paid
on supporting funds declined to 3.88 percent from 3.90 percent in 1997.

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) was approximately 71 and 60 basis points during both
six month periods ended June 30, 1998 and 1997, respectively, and 70 and 61
basis points for the respective three month periods ended June 30, 1998 and
1997. This trend reflects the continued deposit pricing pressure exerted on
interest margins, due to a shifting of these deposits to interest-bearing
accounts. Historically the Corporation has enjoyed more favorable volumes of
these deposits which further underscores the change to more reliance on
interest-bearing funding sources.

Investments

For the six months ended June 30, 1998, the average volume of investment
securities decreased by $6.9 million as compared to the same period in 1997. The
tax-equivalent yield on investments decreased to 6.52 percent or 13 basis points
from a yield of 6.65 percent during the six month period ended June 30, 1997.
The decline in the yield on the investment portfolio during the first six months
of 1998 was offset through the purchase of higher coupon callable securities to
replace, in certain cases, higher yielding investments which had matured, were
prepaid, or were called.

For the three months ended June 30, 1998, the average volume of investment
securities decreased by $14.9 million to $302.2 million from approximately
$317.1 million on average for the same three month period in 1997. The
tax-equivalent yield on the investments was 6.46 percent and 6.68 percent in
1998 and 1997, respectively.

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
investment maturities, resulting in narrowed spreads and by the flatness of the
yield curve and uncertainty of future 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.

<PAGE>

For the six months ended June 30, 1998, the total investment portfolio excluding
overnight investments, averaged $299.7 million, or 67.2 percent of
earning-assets, as compared to $303.6 million or 69.6 percent for the six months
ended June 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.

Loans

Loan growth during the first six 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 stabilization of yield in the portfolio was the result of a stable prime
rate environment coupled with a competitive rate structure to attract new loans.
The results of increased volume were lessened by continued re-financing activity
and by the heightened competition for lending relationships that exists in the
market area. 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 six months ended June 30, 1998, average
loan volume increased $13.1 million or 10.72 percent, while portfolio yield
remained flat at 7.92 percent, compared with the same period in 1997. The volume
related factors contributed increased earnings of $520,000 offset by a decline
of $1,000 in the rate related change. The increased total average loan volume
was due to increased customer activity and new products. For the three months
ended June 30, 1998, average loan volume increased $12.6 million, while the
portfolio yield remained flat decreasing by 1 basis point as compared with the
same period in 1997. The volume related factors contributed increased earnings
of $249,000 offset by a decline of $3,000 due to rate related changes. Total
average loan volume increased to $136.6 million with a net interest yield of
7.91 percent, as compared to $124.1 million with a yield of 7.92 percent for the
three months ended June 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 June 30, 1998 the level of allowance was $1,327,000 as
compared to a level of $1,277,000 at June 30, 1997. The provision for loan
losses during the six and three month periods ended June 30, 1998 amounted to
$60,000 and $30,000, respectively. There was no provision during the first six
months 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 0.95 percent and 1.01
percent at June 30, 1998, and 1997, respectively. In Management's view the level
of the allowance as of June 30, 1998 is adequate to cover any loss experience.

During the six month period ended June 30, 1998, the Corporation did not
experience any substantial credit problems within its loan portfolio. Net
charge-offs were approximately $2,000. At June 30, 1998 the Corporation had
non-accrual loans amounting to $143,000 and $129,000 of non-accrual loans at
June 30, 1997. The Corporation continues to aggressively pursue collections of
principal and interest on loans previously charged off.

The Corporation defines impaired loans to consist of non-accrual loans and loans
internally classified as substandard or below, in each instance above an
established dollar threshold. All loans below the established dollar threshold
are considered homogenous and are collectively evaluated for impairment. The
Corporation did not have any impaired loans in either 1998 or 1997.
<PAGE>

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 loan losses for the period ended June 30,
1998 and 1997, respectively, are set forth below.



         Allowance for loan losses
                       (in thousands)
- --------------------------------------------------------------------------------
                            Six Months Ended June 30

                                                          1998            1997

Average loans outstanding                                135,647       $122,509
                                                        --------       --------
Total loans at end of period                             139,524        125,935
                                                        --------       --------

Analysis of the allowance for loan losses
Balance at the beginning of year                           1,269          1,293
 Charge-offs:
 Commercial                                                    0              1
 Real estate-mortgage                                          0              0
 Installment loans                                             8             19
                                                        --------       --------
   Total charge-offs                                           8             20
Recoveries:
 Commercial                                                    0              0
 Real estate-mortgage                                          0              0
 Installment loans                                             6              4
                                                        --------       --------
   Total recoveries                                            6              4
Net Charge-offs:                                               2             16
                                                        --------       --------
Provision for Loan Losses                                     60              0
                                                        ========       ========
 Balance at end of period                               $  1,327       $  1,277
                                                        ========       ========

Ratio of net charge-offs during the period to
 average loans outstanding during the period                0.00%          0.01%
                                                        --------       --------
Allowance for loan losses as a percentage of
total loans                                                 0.95           1.01
                                                        --------       --------




<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 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 June 30, 1998 and 1997, the Corporation had no restructured loans.
Non-accrual loans amounted to $143,000 at June 30, 1998, and were comprised of
one residential mortgage loan and two home equity loans, as compared to $129,000
at June 30, 1997. Past due loans 90 days or more and still accruing amounted to
$81,000 as of June 30, 1998 and $87,000 as of June 30, 1997. Of the balance,
respectively, in each period, $76,000 and $87,000 were comprised of student
loans, which are wholly guaranteed by the U.S. Government. Additionally, the
Corporation did not have any other real estate owned (OREO) at June 30, 1998 and
1997.


- ------------------------------------------------------------------------------
Non-Performing Assets                                  Six Months Ended
                                                           June 30

(dollars in thousands)                                    1998           1997
                                                          ====           ====
Loans past due 90 days and still accruing                  $81            $87
Non-accrual loans                                          143            129
                                                          ====           ====
Total non-performing assets                               $224           $216
                                                          ====           ====




Other Non-Interest Income

The following table presents the principal categories of non-interest income for
the three and six month periods ended June 30, 1998 and 1997.

<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------
(dollars in thousands)                  Three months ended                  Six months ended
                                             June 30,                           June 30,

                                        1998       1997      % change      1998      $ 1997     % change
                                        -----      ----                    ----      ------    
<S>                                     <C>       <C>          <C>         <C>        <C>          <C>  
Other income:                                                                      
  Service charges, commissions and      $168      $137         22.63       $348       $275         26.55
    fees                                                                           
  Other income                            38        39         (2.56)        81         70         15.71
                                        ----      ----                     ----       ----              
       Total other income               $206      $176         17.05       $429       $345         24.35
                                        ----      ----                     ----       ----              
</TABLE>                                                                      


For the six month period ended June 30, 1998, total other (non-interest) income,
reflects an increase of $84,000 or 24.4 percent compared with the comparable six
month period ended June 30, 1997. This overall increase was primarily as a
result of service charges, commissions, and fees. These fees increased primarily
as a result of an increase in ATM surcharge income.

<PAGE>

For the three months ended June 30, 1998, total other (non-interest) income,
increased $30,000 or 17.1 percent as compared to the three months ended June 30,
1997. The increase in other income is primarily due to the increase in service
charges, commissions and fees which primarily increased as a result of an
increase in business activity.

Other Non-Interest Expense

The following table presents the principal categories of non-interest expense
for the three and six month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>

   ---------------------------------------------------------------------------------------------------------
   (dollars in thousands)              Three months ended                    Six months ended
                                            June 30,                             June 30,

   Other expense:                          1998       1997     % change       1998         1997    % change
                                      ----------   --------             -----------   ----------
<S>                                   <C>           <C>             <C>          <C>           <C>           <C>  
  Salaries and employee            $1,431        $1,384             3.40      $2,766        $2,682            3.13
     benefits
  Occupancy expense, net .            258           242             6.61         520           520            0.00
  Premise & equipment expense         283           321           (11.84)        554           649          (14.64)
  Stationery and printing             146           120            21.67         187           196           (4.59)
     expense 
  Marketing & Advertising              93            81            14.81         202           208           (2.97)
  Legal and Consulting                103            39            164.1         212           166           27.71
  Other expenses                      529           529             0.00         979           766           27.81
                                   ------        ------                       ------         -----
        Total other expense        $2,843        $2,716             4.68      $5,420        $5,187            4.49
                                   ------        ------                       ------         -----
</TABLE>

For the six month period ended June 30, 1998, total other (non-interest)
expenses increased $233,000 or 4.5 percent over the comparable period ended June
30, 1997. Salaries and employee benefits costs coupled with legal and consulting
and other expenses (FDIC Insurance, Examination expense, Computer related and
correspondent bank charges) comprised the primary components of the total
increase for the period.

For the three month period ended June 30, 1998 total other (non-interest)
expenses increased $127,000 or 4.7 percent over the comparable three months
ended June 30, 1997. Salaries and employee benefits costs coupled with legal and
consulting as well as occupancy expenses comprised the primary components of the
total increase for the three month period ended June 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 nonrecurring expenses as a percentage of net interest income on a
tax-equivalent basis plus non-interest income) for the six months ended June 30,
1998, was 61.4 percent as compared with 58.5 percent at June 30, 1997. For the
three months ended June 30, 1998 this ratio was 63.8 percent as compared with
61.0 percent for the comparable period ended June 30, 1997.

For the six months ended June 30, 1998, the increase in employment expense is
primarily attributable to merit and promotional raises and the accrual in 1998
of an incentive expense. The increase of $47,000 or 3.4 percent during the three
months ended June 30, 1998 as compared with the comparable three month period in
1997, was also attributable to these factors. The Corporation employed 144
full-time equivalent employees at June 30, 1998 versus 153 at June 30, 1997.
Staffing levels required to support the growth of the Bank and to maintain
current staffing levels at the Corporation's office locations were achieved
though the use of temporary staff, who are not included in the employee count
for 1998 but the expense is included as part of employment expense.

Occupancy and equipment expenses for the six months ended June 30, 1998
decreased by $95,000 or 8.13 percent compared to the comparable period ended
June 30, 1997. This decrease in expense is primarily attributed to lower
depreciation expense on furniture and equipment as well as lower repair and
maintenance expenses on equipment.

Occupancy and equipment expenses for the three months ended June 30, 1998
decreased $22,000 or 3.91 percent from the comparable three month period in
1997. The decrease in expenses occurred in the same expense categories as noted
above, with the exception that the increase in occupancy expense is related to
our new Morristown banking center and rental increases on other leased
locations.

<PAGE>



Provision for Income Taxes

The effective tax rate for the six month period ended June 30, 1998 was 33.9
percent as compared to 31.1 percent for the six months ended June 30, 1997. The
effective tax rate for the six months ended June 30, 1998 approximates the
statutory federal tax rate of 34 percent. The increase in the effective tax
rates reflects the decreasing 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.

Interest Sensitivity
The management of interest rate risk is also important to the profitability of
the Corporation. Interest rate risk arises when an earning asset matures or when
its interest rate changes in a time period different from that of a supporting
interest bearing liability, or when an interest bearing liability matures or
when its interest rate changes in a time period different from that of an
earning asset that it supports. While the Corporation matches only a small
portion of specific assets and liabilities, total earning-assets and interest
bearing liabilities are grouped to determine the overall interest rate risk
within a number of specific time frames.

Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
the interest sensitivity gap. At any given point in time, the Corporation may be
in an asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities, or in a liability-sensitive position, whereby
its interest-sensitive liabilities exceed its interest-sensitive assets,
depending on management's judgment as to projected interest rate trends.

The Corporation's rate sensitivity position in each time frame may be expressed
as assets less liabilities, as liabilities less assets, or as the ratio between
rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a
short funded position (liabilities repricing before assets) would be expressed
as a net negative position, when period gaps are computed by subtracting
repricing liabilities from repricing assets. When using the ratio method, a
RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1
indicates an asset sensitive position, and a ratio less than 1 indicates a
liability sensitive position.

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 June 30, 1998, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio) of .50:1.0 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 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.



<PAGE>



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 June 30, 1998, projected to June of 1999, indicates
that the Bank's liquidity should remain strong, with an approximate projection
of $100.2 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 six month period ended June 30, 1998, average core
deposits (comprised of total demand, savings accounts and money market accounts
under $100,000) represented 50.9 percent of total deposits as compared with 47.6
percent on average in the comparable period in 1997. More volatile rate
sensitive deposits, concentrated in time certificates of deposit for the six
month period ended June 30, 1998, decreased slightly to 39.2 percent on average
of total deposits from 39.5 percent during the six months ended June 30, 1997.

Average funding sources during the six months ended June 30, 1998 decreased by
approximately $5.1 million compared to 1997. The decrease was attributed to
outflows in savings and time accounts offset in part by an increase in demand
deposits and short-term borrowings. Non-interest bearing funding sources as a
percentage of the funding mix increased to 16.5 percent on average as compared
to 15.9 percent for the six month period ended June 30, 1997. Demand deposits as
a percentage of the funding mix continue to be replaced by more expensive
interest-bearing core deposits.

Short-term borrowings can be used to satisfy daily funding needs. Balances in
these accounts fluctuate significantly on a day-to-day basis. The Corporation's
principal short-term funding sources are securities sold under agreement to
repurchase and advances from the Federal Home Loan Bank (FHLB). Average
short-term borrowings during the first six months of 1998 were $16.7 million, an
increase of $5.8 million or 53.3 percent from $10.9 million in average
short-term borrowings during the comparable six months ended June 30, 1997. This
change was primarily due to insufficient core deposit funding.

Cash Flow

The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. During the six
months ended June 30, 1998, cash and cash equivalents (which increased overall
by $7.7 million) were provided (on a net basis) by approximately $3.0 million in
cash flows from operating activities and by $12.6 million in cash flows provided
by financing activities. A total of $7.8 million was used in investing
activities, of that amount $7.2 million was used to increase loans.

Stockholders' Equity

Stockholders' equity averaged $34.5 million for the six month period ended June
30, 1998, an increase of $3.6 million or 11.7 percent from $30.9 million, for
the same period in 1997. The Corporation's dividend reinvestment and optional
stock purchase plan contributed $165,000 in new capital for the six months ended
June 30, 1998 as compared with $145,000 for the comparable period in 1997.
Tangible book value per common share, after the 3-for-2 stock split effective
May 1, 1998, distributed May 29, 1998, and the 5% stock dividend effective May
18, 1997, distributed May 31, 1997, was $8.94 at June 30, 1998 as compared to
$8.48 at December 31, 1997. Tangible book value per common share was $7.86 at
June 30, 1997, as adjusted for the above noted stock split and 5% stock
dividend.
<PAGE>

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 June 30, 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 June 30, 1998, total Tier l capital (defined as tangible stockholders' equity
for common stock and certain perpetual preferred stock) amounted to $31,011
million or 6.35 percent of total assets. The total Tier II leverage capital
ratio was 6.62 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $796,000 of net unrealized gain, after tax, on
securities available-for-sale (included as a component of stockholders' equity)
and goodwill of approximately $3.220 million as of June 30, 1998.

At June 30, 1998, the Corporation's estimated Tier I risk based and total
risk-based capital ratios were 15.84 percent and 16.51 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of June 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
10.5%.

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 June 30, 1998, management believes that the Bank meets all capital
adequacy requirements to which it is subject.




<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 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.

As of June 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. 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.


<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 - June 30, 1998

               B)   Reports on Form 8-K
                    There were no reports on Form 8-K filed during the three
                    months ended June 30, 1998.




<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: August 14, 1998                  /s/ Anthony C. Weagley
- ---------------------                  -----------------------------------
                                           Anthony C. Weagley, Treasurer
                                           (Chief Financial Officer)




<TABLE> <S> <C>

<ARTICLE> 9
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-END>                               JUN-30-1998
<CASH>                                          14,517
<INT-BEARING-DEPOSITS>                         342,591
<FED-FUNDS-SOLD>                                19,300
<TRADING-ASSETS>                                     0
<INVESTMENTS-HELD-FOR-SALE>                    112,378
<INVESTMENTS-CARRYING>                         186,432
<INVESTMENTS-MARKET>                           183,197
<LOANS>                                        139,524
<ALLOWANCE>                                    (1,327)
<TOTAL-ASSETS>                                 488,329
<DEPOSITS>                                     422,073
<SHORT-TERM>                                    27,959
<LIABILITIES-OTHER>                              3,270
<LONG-TERM>                                          0
                                0
                                          0
<COMMON>                                         7,461
<OTHER-SE>                                      27,566
<TOTAL-LIABILITIES-AND-EQUITY>                 488,329
<INTEREST-LOAN>                                  5,370
<INTEREST-INVEST>                                9,229
<INTEREST-OTHER>                                   286
<INTEREST-TOTAL>                                15,252
<INTEREST-DEPOSIT>                               6,566
<INTEREST-EXPENSE>                               7,042
<INTEREST-INCOME-NET>                            8,210
<LOAN-LOSSES>                                       60
<SECURITIES-GAINS>                                   0
<EXPENSE-OTHER>                                  5,420
<INCOME-PRETAX>                                  3,169
<INCOME-PRE-EXTRAORDINARY>                       2,089
<EXTRAORDINARY>                                      0
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