<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, 1999 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO___________
Commission file number 2-81353
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CENTER BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-1273725
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 Morris Avenue, Union, New Jersey 07083
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(Address of principal executives offices) (Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes|X| No|_|
Shares outstanding on September 30, 1999
- ----------------------------------------
Common stock, no par value: 3,788,856 shares
<PAGE>
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Condition
at September 30, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998
(Unaudited) 5
Notes to the Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-21
Item 3. Qualitative and Quantitative Disclosures about
Market Risks 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 6. Exhibits 23
Signature 24
Exhibit Index/Data Schedule 25
30-September-99 Center Bancorp, Inc. Form 10Q 2
<PAGE>
Center Bancorp, Inc.
Consolidated Statements of Condition
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets:
Cash and due from banks $ 12,366 $ 15,975
Investment securities held to maturity (approximate
market value of $189,759 in 1999 and $174,184 in 1998) 193,671 172,014
Investment securities available-for-sale 122,813 115,952
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities 316,484 287,966
Loans, net of unearned income 164,789 150,099
Less - Allowance for loan losses (1,348) (1,326)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 163,405 148,773
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 9,877 9,426
Accrued interest receivable 5,136 4,120
Other assets 829 815
Goodwill 2,817 3,059
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Total assets $ 510,914 $ 470,134
====================================================================================================================================
Liabilities
Deposits:
Non-interest bearing $ 88,425 $ 82,072
Interest bearing:
Certificates of deposit $100,000 and over 52,882 53,056
Savings and time deposits 246,535 242,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 387,842 377,167
Federal funds purchased and securities sold under
agreements to repurchase 28,592 12,602
Federal Home Loan Bank advances 55,000 40,000
Accounts payable and accrued liabilities 2,631 3,734
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 474,065 433,503
Stockholders' equity:
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,248,318 and
4,222,559 shares in 1999 and 1998 respectively 7,866 7,616
Additional paid in capital 3,748 3,660
Retained earnings 27,795 25,978
Less - Treasury stock at cost (459,462 shares in 1999 and 485,642 shares
in 1998 respectively) (1,694) (1,736)
Accumulated other comprehensive (loss) income (866) 1,113
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 36,849 36,631
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 510,914 $ 470,134
====================================================================================================================================
</TABLE>
All share amounts have been restated to reflect the 5% stock dividend
distributed June 1, 1999 to stockholders of record May 18, 1999 and the 3-for-2
stock split distributed on May 29, 1998.
See Accompanying Notes To Consolidated Financial Statements
30-September-99 Center Bancorp, Inc. Form 10Q 3
<PAGE>
Center Bancorp, Inc
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------------------------------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,088 $ 2,738 $ 8,975 $ 8,108
Interest and dividends on investment securities:
Taxable interest income 4,771 4,700 13,671 13,929
Nontaxable interest income 210 166 628 533
Interest on Federal funds sold and securities
purchased under agreement to resell 102 154 365 440
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 8,171 7,758 23,639 23,010
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on certificates of deposit $100,000 or more 736 995 1,962 3,622
Interest on savings and time deposits 1,857 2,040 5,431 5,979
Interest on borrowings 690 371 1,929 847
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,283 3,406 9,322 10,448
Net interest income 4,888 4,352 14,317 12,562
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 36 30 72 90
Net interest income after provision for loan losses 4,852 4,322 14,245 12,472
- ------------------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees 235 188 632 536
Other income 51 74 170 155
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Total other income 286 262 802 691
- ------------------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 1,749 1,534 5,064 4,300
Occupancy expense, net 330 285 926 805
Premises and equipment expense 303 317 966 871
Stationery and printing expense 82 130 356 317
Marketing and advertising 116 161 419 363
Other expenses 767 674 2,060 1,865
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expense 3,347 3,101 9,791 8,521
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,791 1,483 5,256 4,642
Income tax expense 629 504 1,793 1,574
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,162 $ 979 $ 3,463 $ 3,068
====================================================================================================================================
Earnings per share
Basic $ 0.31 $ 0.26 $ 0.92 $ 0.82
Diluted 0.31 0.26 0.91 0.81
- ------------------------------------------------------------------------------------------------------------------------------------
Average weighted common shares outstanding
Basic 3,787,193 3,748,815 3,773,417 3,737,265
Diluted 3,805,261 3,777,723 3,796,890 3,774,136
====================================================================================================================================
</TABLE>
All share and per share amount s have been restated to reflect the 5% dividend
distributed June 1, 1999 to stockholders of record May 18, 1999 and the 3-for-2
stock split distributed on May 29, 1998.
See Accompanying Notes To Consolidated Financial Statements
30-September-99 Center Bancorp, Inc. Form 10Q 4
<PAGE>
Center Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
\ Nine Months Ended
September 30,
(Dollars in thousands) 1999 1998
- ------------------------------------------------------- -------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,463 $ 3,068
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,068 1,029
Provision for loan losses 72 90
(Increase) decrease in accrued interest receivable (1,016) 150
Increase in other assets (14) (310)
(Decrease) increase in other liabilities (1,103) 1,013
Amortization of premium and accretion of
discount on investment securities, net 18 167
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,488 5,207
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 22,998 56,230
Proceeds from maturities of securities held-to-maturity 42,465 47,875
Proceeds from sales of investment securities available-for-sale 2,997 0
Purchase of securities available-for-sale (34,246) (50,923)
Purchase of securities held-to-maturity (64,730) (48,814)
Net increase in loans (14,704) (10,463)
Property and equipment expenditures, net (1,277) (903)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (46,497) (6,998)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits 10,675 (58,763)
Dividends paid (1,645) (1,485)
Proceeds from issuance of common stock 380 459
Net increase in borrowings 30,990 47,961
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 40,400 (11,828)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,609) (13,619)
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 15,975 26,110
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,366 $ 12,491
=========================================================================================================
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings: $ 9,422 $ 10,470
Income taxes $ 1,708 $ 1,452
</TABLE>
30-September-99 Center Bancorp, Inc. Form 10Q 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 inter-company 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 5%
stock dividend distributed June 1, 1999 to stockholders of record May 18, 1999.
Also reflected and restated for all prior periods is the 3-for-2 stock split
distributed on May 29, 1998. Results for the period ended September 30, 1999 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, 1998 for information regarding accounting
principles.
Note 2
Recent Accounting Pronouncements
SFAS No. 133 and No. 137
In June 1998, the FASB issued 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 condition 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, or
(b) a hedge of the 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.
30-September-99 Center Bancorp, Inc. Form 10Q 6
<PAGE>
This Statement was originally 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 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.
In June of 1999 FASB issued SFAS No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", which amended SFAS No. 133 to be effective for all fiscal years beginning
after June 15, 2000.
NOTE 3
The following table outlines the Corporation's comprehensive income for the
three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
Comprehensive Income 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $ 1,162 $ 979 $ 3,463 $ 3,068
Other comprehensive income
Unrealized holding (losses)gains arising
during the period, net of taxes (582) 373 (1,979) 1,169
- ------------------------------------------------------------------------------------------------------------------------
Other total comprehensive income (loss) $ (582) $ 373 $ (1,979) $ 1,169
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 580 $ 1,352 $ 1,489 $ 4,237
========================================================================================================================
</TABLE>
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income for the three months ended September 30, 1999 amounted to $1,162,000
as compared to $979,000 earned for the comparable three month period ended
September 30, 1998. On a per diluted share basis, earnings increased to $.31 per
share as compared with $.26 per share for the three months ended September 30,
1998. The annualized return on average assets was .91 percent compared with .82
percent for the comparable three month period in 1998. The annualized return on
average stockholders' equity was 12.47 percent for the three month period ended
September 30, 1999 as compared to 10.91 percent for the comparable three months
ended September 30, 1998. Earnings performance for the third quarter of 1999
primarily reflects an increase in net interest income offset by higher operating
and income tax expenses.
Net income and earnings per diluted share increased 12.87 and 12.35 percent,
respectively, for the first nine months of 1999 compared to the first nine
months of 1998. Net income for the nine months ended September 30, 1999 was
$3,463,000 as compared to $3,068,000 earned for the comparable nine month period
of 1998. On a per diluted share basis, earnings were $.91 as compared to $.81
per share for the nine months ended September 30, 1998. The annualized return on
average assets was .93 percent for the nine months ended September 30, 1999 as
compared with .86 percent for the comparable period in 1998, while the
annualized return on average stockholders' equity was 12.41 percent and 11.70
percent, respectively. Earnings performance for the nine months ended September
30, 1999, 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 5% stock dividend distributed on
June 1, 1999 and the 3 for 2 stock split distributed in May of 1998.
30-September-99 Center Bancorp, Inc. Form 10Q 7
<PAGE>
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
1999 1998 Change 1999 1998 Change
--------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Investments $ 4,981 $ 4,866 2.36 $ 14,299 $ 14,462 (1.13)
Loans, including fees 3,088 2,738 12.78 8,975 8,108 10.69
Federal funds sold and securities
sold under agreements to
repurchase 102 154 (33.77) 365 440 (17.05)
---------- ----------- ---------- ----------
Total interest income 8,171 7,758 5.32 23,639 23,010 2.74
- -------------------------------------------------- ----------- ---------- ----------
Interest expense:
Certificates $100,000 or more 736 995 (26.03) 1,962 3,622 (45.83)
Savings and Time Deposits 1,857 2,040 (8.97) 5,431 5,979 (9.17)
FHLB advances and other
borrowings 690 371 85.98 1,929 847 127.74
---------- ----------- ---------- ----------
Total interest expense 3,283 3,406 (3.61) 9,322 10,448 (10.78)
- -------------------------------------------------- ----------- ---------- ----------
Net interest income* 4,888 4,352 12.32 14,317 12,562 13.97
- -------------------------------------------------- ----------- ---------- ----------
Tax-equivalent adjustment 108 86 25.58 324 275 17.82
Net interest income on a fully
tax-equivalent basis $ 4,996 $ 4,438 12.57 $ 14,641 $ 12,837 14.05
================================================== =========== ========== ==========
*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.
</TABLE>
Net interest income on a fully tax-equivalent basis increased $558,000 or 12.6
percent to approximately $5.0 million for the three months ended September 30,
1999, from $4.4 million for the comparable period in 1998. For the three months
ended September 30, 1999, the net interest margin increased to 4.18 percent from
3.97 percent due to a more favorable mix of interest-bearing liabilities and a
decreased cost of funds. For the three months ended September 30, 1999, a
decrease in the average yield on interest-earning assets of ten basis points was
offset by a decrease in the average cost of interest-bearing liabilities of 33
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 interest- earning assets increased by
$31.1 million, from the comparable three month period in 1998. The net increase
in average interest-bearing liabilities was $20.1 million over the comparable
three month period in 1998. The 1999 third quarter changes in average interest
earning asset volumes were primarily due to increased volumes of loans and
taxable and non-taxable investment securities, funded primarily by core
deposits, cash flows from the investment portfolio and increased borrowings.
30-September-99 Center Bancorp, Inc. Form 10Q 8
<PAGE>
Net interest income on a fully tax-equivalent basis for the nine months ended
September 30, 1999 increased $1,804,000 or 14.1 percent, to approximately $14.6
million from the comparable nine month period in 1998. The Corporation's net
interest margin for the nine months in 1999 increased to 4.20 percent from 3.84
percent due primarily to a decreased cost of funds. The average rate paid for
interest bearing liabilities declined 49 basis points and offset the nine basis
point decline in the average rate earned on assets. For the nine months ended
September 30, 1999 average- interest earning assets increased by $19 million on
average as compared with the nine months ended September 30, 1998. 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, 1999 interest income on a fully
tax-equivalent basis increased by $435,000 or 5.5 percent from the comparable
three month period in 1998. The primary factor contributing to the increase was
the previously cited increase in average earning assets. The Corporation's loan
portfolio increased on average $21.3 million to $161.7 million from $140.4
million in the same quarter in 1998, primarily driven by growth in commercial
loans, commercial and residential mortgages and home equity loans. This growth
was funded primarily through an increase in deposits and borrowings. The loan
portfolio (traditionally the Corporations highest yielding earning asset)
represented approximately 33.8 percent of the Corporation's interest-earning
assets (on average) during the third quarter of 1999 and 31.4 percent in 1998.
Interest income on a fully tax-equivalent basis for the nine month period ended
September 30, 1999 increased by approximately $678,000 or 2.9 percent, as
compared to the comparable period ended September 30, 1998. The Corporation's
average loan portfolio increased $20.5 million to $157.8 million from $137.3
million in the comparable period of 1998. This growth was primarily driven by
growth in commercial loans, commercial and residential mortgages, and home
equity loans. This volume increase was funded primarily by an increase in
deposits and borrowings. The loan portfolio represented approximately 33.9
percent of the Corporation's interest-earning assets (on average) for the nine
months ended September 30, 1999 as compared with 30.7 percent for the comparable
period in 1998.
Average investment volume for the three months ended September 30, 1999
increased $12.9 million to approximately $308.9 million compared to $296.0
million for the three months of 1998. For the nine months ended September 30,
1999 average investments decreased $752,000 to $297.7 million.
Interest expense for the three months ended September 30, 1999, decreased
$123,000 or 3.6 percent from the comparable three month period ended September
30, 1998, as a result of a decrease in interest rates and 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, 1998.
For the nine months ended September 30, 1999, interest expense decreased
$1,126,000 or 10.8 percent as compared with the comparable nine month period in
1998. Interest expense for the nine months ended September 30, 1999 decreased
primarily as a result of a decline in interest rates. The amount of the decrease
attributable to volume factors was $27,000 while $1.1 million was due to rate.
For the three months ended September 30, 1999, the Corporation's net interest
spread on a tax-equivalent basis increased to 3.50 percent from 3.27 percent for
the three months ended September 30, 1998. 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 increased loan volumes, but the yield on
interest-earning assets declined to 6.92 percent from 7.02 percent. This was
offset by a change in a mix of interest-bearing liabilities to less costly
funding. The yield on total interest-bearing liabilities decreased to 3.42
percent for the three months ended September 30, 1999 from 3.75 percent for the
three months ended September 30, 1998.
For the nine months ended September 30, 1999, the Corporation's net interest
spread on a tax-equivalent basis increased to 3.53 percent from 3.13 percent for
the nine months ended September 30, 1998. This increase primarily reflected a
widening of spreads due to the change in the mix of interest-bearing liabilities
to less costly funding.
30-September-99 Center Bancorp, Inc. Form 10Q 9
<PAGE>
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) narrowed to approximately 67 basis points from 71
basis points during the nine month periods ended September 30, 1998 and 1999,
respectively, and to 68 basis points from 70 basis points for the respective
three month periods ended September 30, 1998 and 1999.
The following table "Analysis of Variance in Net Interest Income due to Volume
and Rates" analyzes net interest income by segregating the volume and rate
components of various interest-earning assets and liabilities and the resultant
changes in the rates earned and paid by the Corporation.
Analysis of Variance in Net Interest Income Due to
Volume and Rates
(Tax-Equivalent Basis)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended 9/30/99 Nine Months Ended 9/30/99
1999/1998 Increase/(Decrease) 1999/1998 Increase/(Decrease)
(Dollars in thousands) Due to Change in: Due to Change in:
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate Change
--------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investment Securities
Taxable $ 141 $ (70) $ 71 $ (197) $ (61) $ (258)
Non-taxable 75 (9) 66 168 (24) 144
Federal funds sold and securities
purchased under agreement to resell 5 (57) (52) (34) (41) (75)
Loans, net of unearned income 407 (57) 350 1,180 (313) 867
--------- -------- -------- --------- ------- -------
Total interest-earning assets $ 627 $ (192) $ 435 $ 1,117 $ (439) $ 678
========= ======== ======== ========= ======= =======
Interest-bearing liabilities:
Money Market deposits $ 64 $ 16 $ 80 $ 209 $ 42 $ 251
Savings deposits 4 (21) (17) (14) (194) (208)
Time deposits (216) (216) (432) (1,429) (793) (2,222)
Other interest-bearing deposits 15 (19) (4) 49 (78) (29)
Borrowings 278 (28) 250 1,158 (76) 1,082
--------- -------- -------- --------- ------- -------
Total interest-bearing liabilities 143 (266) (123) (27) (1,099) (1,126)
--------- -------- -------- --------- ------- -------
Change in net interest income $ 484 $ 74 $ 558 $ 1,145 $ 659 $ 1,804
====================================================================================================================================
</TABLE>
30-September-99 Center Bancorp, Inc. Form 10Q 10
<PAGE>
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three months ended September 30, 1999 and 1998 the
Corporation's average assets, liabilities and stockholders' equity. The
Corporation's net interest income, net interest spreads and net interest income
as a percentage of interest-earning assets are also reflected.
Average Balance Sheet with Interest and Average Rates
<TABLE>
<CAPTION>
Three Month
Period Ended September 30,
1999 1998
------------------------------------- -----------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax-equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities: (1)
Taxable $ 290,403 $ 4,771 6.57% $ 281,883 $ 4,700 6.67%
Non-taxable 18,487 318 6.88% 14,150 252 7.12%
Federal funds sold and securities
purchased under agreement to resell 7,804 102 5.23% 10,796 154 5.71%
Loans, net of unearned income (2) 161,694 3,088 7.64% 140,427 2,738 7.80%
------------------------ --------------------------------------- -------
Total interest-earning assets 478,388 8,279 6.92% 447,256 7,844 7.02%
---------- --------
Non-interest earning assets
Cash and due from banks 12,944 11,838
Other assets 18,967 17,682
Allowance for possible loan losses (1,366) (1,339)
---------- -----------
Total non-interest earning
assets 30,545 28,181
---------- -----------
Total assets $ 508,933 $ 475,437
---------- -----------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 70,886 559 3.15% $ 62,747 479 3.05%
Savings deposits 75,414 368 1.95% 74,709 385 2.06%
Time deposits 126,284 1,463 4.63% 143,766 1,895 5.27%
Other interest - bearing deposits 47,870 203 1.70% 44,418 207 1.86%
Borrowings 63,265 690 4.36% 37,937 440 4.64%
---------- ---------- ------- ----------- -------- -------
Total interest-bearing
liabilities 383,719 3,283 3.42% $ 363,577 3,406 3.75%
---------- -----------
Non-interest-bearing liabilities:
Demand deposits 84,822 72,011
Other noninterest-bearing deposits 375 476
Other liabilities 2,751 3,483
---------- -----------
Total noninterest-bearing
liabilities 87,948 75,970
Stockholders' equity 37,266 35,890
---------- -----------
Total liabilities and
stockholders' equity $ 508,933 $ 475,437
---------- -----------
Net interest income (tax-equivalent basis) $ 4,996 $ 4,438
---------- --------
Net Interest Spread 3.50% 3.27%
------- -------
Net interest income as percent
of earning-assets 4.18% 3.97%
------- -------
Tax equivalent adjustment (108) (86)
---------- --------
Net interest income $ 4,888 $ 4,352
---------- --------
</TABLE>
(1) Average balances for available-for-sale securities are based on amortized
cost
(2) Average balances for loans include loans on non-accrual status
30-September-99 Center Bancorp, Inc. Form 10Q 11
<PAGE>
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the nine months ended September 30, 1999 and 1998 the Corporation's
average assets, liabilities and stockholders' equity. The Corporation's net
interest income, net interest spreads and net interest income as a percentage of
interest-earning assets are also reflected.
Average Balance Sheet with Interest and Average Rates
<TABLE>
<CAPTION>
Nine Month
Period Ended September 30,
1999 1998
------------------------------------- -----------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax-equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities (1)
Taxable $ 279,175 $ 13,671 6.53% $ 283,185 $ 13,929 6.56%
Non-taxable 18,506 952 6.86% 15,248 808 7.07%
Federal funds sold and securities
purchased under agreement to resell 9,550 365 5.10% 10,385 440 5.65%
Loans, net of unearned income (2) 157,842 8,975 7.58% 137,258 8,108 7.88%
------------------------ ---------------------------------------- -------
Total interest-earning assets 465,073 23,963 6.87% 446,076 23,285 6.96%
---------- --------
Non-interest earning assets
Cash and due from banks 13,030 12,145
Other assets 18,386 17,597
Allowance for possible loan losses (1,347) (1,309)
---------- -----------
Total non-interest earning
assets 30,069 28,433
--------- -----------
Total assets $ 495,142 $ 474,509
---------- -----------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 68,672 1,563 3.03% $ 59,454 1,312 2.94%
Savings deposits 75,172 1,097 1.95% 76,015 1,305 2.29%
Time deposits 122,117 4,171 4.55% 161,744 6,393 5.27%
Other interest bearing deposits 46,818 562 1.60% 43,036 591 1.83%
Borrowings 59,293 1,929 4.34% 23,862 847 4.73%
--------- ---------- ------- ----------- -------- -------
Total interest-bearing
liabilities 372,072 9,322 3.34% $ 364,111 10,448 3.83%
---------- -----------
Noninterest-bearing liabilities:
Demand deposits 82,179 71,746
Other noninterest-bearing deposits 399 438
Other liabilities 3,271 3,223
--------- -----------
Total noninterest-bearing
liabilities 85,849 75,407
Stockholders' equity 37,221 34,991
---------- -----------
Total liabilities and
stockholders' equity $ 495,142 $ 474,509
---------- -----------
Net interest income (tax-equivalent basis) $ 14,641 $ 12,837
---------- --------
Net Interest Spread 3.53% 3.13%
------- ------
Net interest income as percent
of earning-assets 4.20% 3.84%
------- ------
Tax equivalent adjustment (324) (275)
---------- --------
Net interest income $ 14,317 $ 12,562
---------- --------
</TABLE>
(1) Average balances for available-for-sale securities are based on amortized
cost
(2) Average balances for loans include loans on non-accrual status
30-September-99 Center Bancorp, Inc. Form 10Q 12
<PAGE>
Investments
For the three months ended September 30, 1999, the average volume of investment
securities increased to $308.9 million or an increase of $12.9 million from
$296.0 million on average for the same three month period in 1998. The
tax-equivalent yield on the investment portfolio declined to 6.59 percent from
6.69 percent for the comparable three month period in 1998. Purchases made to
replace maturing and called investments were not made at comparable rates and in
some cases the monies were not re-invested in the Investment Portfolio.
For the nine months ended September 30, 1999, the average volume of investment
securities decreased by $752,000 when compared to the same period in 1998. The
tax-equivalent yield on investments decreased to 6.55 percent or 2 basis points
from a yield of 6.57 percent for the nine month period ended September 30, 1998.
The decreased yield on the investment portfolio during the first nine months of
1999 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 most notably in the volume of callable Federal Agency Securities
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 respecting rates. Securities available-for-sale are a part of the
Corporation's interest rate risk management strategy and may be sold in response
to changes in interest rates, changes in prepayment risk, liquidity management
and other factors.
For the nine months ended September 30, 1999, the total investment portfolio
excluding overnight investments, averaged $297.7 or 64.0 percent of earning
assets, as compared to $298.4 million or 64.0 percent at September 30, 1998. 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, 1999 the net unrealized gain/loss carried as a component of
other comprehensive income and included in shareholders' equity amounted to a
net unrealized loss of $866,000 as compared with an unrealized gain of
$1,113,000 at December 31, 1998 resulting from a deterioration in the bond
market due to rising interest rates fostered by the Federal Open Market
Committee's pre-emptive strikes against inflation. Bond prices have fallen as
interest rates rose.
Loans
Loan growth during the first nine months of 1999 occurred in all segments of the
loan portfolio. This growth resulted from the Corporation's business development
efforts enhanced by the Corporation's entry into new markets through branching.
The decline of the loan portfolio yield for the three and nine month periods was
the result of a lower prime rate environment during the first nine months of
1999 coupled with a competitive rate structure to attract new loans and by the
heightened competition for lending relationships that exists in the
Corporation's market. 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, 1999,
average loan volume increased $20.6 million or 15.0 percent, while portfolio
yield declined by 30 basis points as compared with the same period in 1998. The
increased total average loan volume was due primarily to increased customer
activity, new lending relationships, and new markets. For the three months ended
September 30, 1999, average loan volume increased $21.3 million primarily as a
result of aggressive business development efforts aimed at the business
customers. The robust economic environment in building sector of New Jersey.
This resulted in an increase of commercial real estate loans in the portfolio.
This change in volume was somewhat affected by a decline in portfolio yield of
16 basis points as compared with the same period in 1998. The volume related
factors contributed increased earnings of $407,000 offset by a decline of
$57,000 due to rate related changes. Total average loan volume increased to
$161.7 million with a net interest yield of 7.64 percent, as compared to $140.4
million with a yield of 7.80% for the three months ended September 30, 1998.
30-September-99 Center Bancorp, Inc. Form 10Q 13
<PAGE>
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
inherent in the loan portfolio 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. The level and trend of interest rates and current economic
conditions are also reviewed.
At September 30, 1999 the allowance was $1,384,000 as compared to $1,326,000 on
December 31, 1998. The provision for loan losses during the nine and three month
periods ended September 30, 1999 amounted to $72,000 and $36,000 respectively.
Such provision amounted to $90,000 and $30,000 for the nine and three month
periods ended September 30, 1998.
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 .84 percent and .95
percent at September 30, 1999, and 1998, respectively. In management's view the
level of the allowance at September 30, 1999 is adequate to cover potential
losses inherent in the loan portfolio.
During the nine month period ended September 30, 1999, the Corporation did not
experience any substantial problems within its loan portfolio. Net charge-offs
were approximately $14,000. At September 30, 1999 the Corporation had
non-accrual loans amounting to $315,000 versus $41,000 in non-accrual loans at
December 31, 1998. 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 of $250,000. 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 1999 or
1998.
The Corporation's statements herein regarding the adequacy of the allowance for
loan losses may constitute forward looking statements under the Private
Securities Litigation Reform 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 in establishing the amount of the allowance.
30-September-99 Center Bancorp, Inc. Form 10Q 14
<PAGE>
Changes in the allowance for loan losses for the periods ended September 30,
1999 and 1998, respectively, are set forth below.
Allowance for loan losses
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
------------------------------
1999 1998
--------- ----------
<S> <C> <C>
Average loans outstanding $ 157,842 $ 137,258
- ------------------------------------------------------------------------------------------------------
Total loans at end of period 164,789 142,885
- ------------------------------------------------------------------------------------------------------
Analysis of the allowance for loan losses
Balance at the beginning of period 1,326 1,269
Charge-offs:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 17 9
- ------------------------------------------------------------------------------------------------------
Total charge-offs 17 9
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 3 7
- ------------------------------------------------------------------------------------------------------
Total recoveries 3 7
Net Charge-offs: 14 2
Provisions for loan losses 72 90
======================================================================================================
Balance at end of period $ 1,384 $ 1,357
======================================================================================================
Ratio of net charge-offs during the period to
Average loans outstanding during the period 0.00% 0.00%
- ------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of total loans 0.84% 0.95%
- ------------------------------------------------------------------------------------------------------
</TABLE>
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 status, 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.
30-September-99 Center Bancorp, Inc. Form 10Q 15
<PAGE>
At September 30, 1999, December 31, 1998 and September 30, 1998, the Corporation
had no restructured loans. Non-accrual loans amounted to $315,000 at September
30, 1999, and were primarily comprised of first and second lien mortgages. At
December 31, 1998 non-accrual loans amounted to $41,000 comprised of two home
equity loans. At September 30, 1998, non-accrual loans amounted to $149,000 and
were comprised of first and second lien home mortgages. At September 30, 1999
the Corporation's loans 90 days past due and still accruing amounted to
approximately $2,400. Such loans amounted to $24,000 at December 31, 1998 and
$86,000 at September 30, 1998.
The outstanding balances of accruing loans which are 90 days or more past due as
to principal or interest payments and non-accrual loans at September 30, 1999
and September 30, 1998 were as follows:
------------------------------------------------------------------------
Non-Performing Loans at September 30, December 31,
-----------------------
(Dollars in thousands) 1999 1998
========================================================================
Loans past due 90 days and still accruing $ 2 $ 41
Non-accrual loans 315 24
------------------------------------------------------------------------
Total non-performing loans $ 317 $ 65
========================================================================
At September 30, 1999, non-performing assets, consisting of loans on non-accrual
status plus other real estate owned (OREO) amounted to $388,000 or .24 percent
of total loans outstanding as compared to $114,000 or .08 percent at December
31, 1998 and $149,000 or .10 percent at September 30, 1998.
At September 30, 1999 and December 31, 1998 the Corporation's other real estate
owned (OREO) consisted of a closed branch facility with a carrying value of
approximately $73,000. The Corporation did not have any OREO at September 30,
1998.
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, 1999 and 1998.
<TABLE>
<CAPTION>
=======================================================================================================================
(dollars in thousands) Three months ended Nine months ended
September 30, September 30,
1999 1998 % change 1999 1998 % change
------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and fees $ 235 $ 188 25.00 $ 632 $ 536 17.91
Other income 51 74 (31.08) 170 155 9.68
------ ------ ------ ------
Total other income $ 286 $ 262 9.16 $ 802 $ 691 16.06
====================================================== ====== ====== ====== ====== =====
</TABLE>
For the three months ended September 30, 1999, total other (non-interest)
income, increased $24,000 or 9.2 percent as compared to the three months ended
September 30, 1998. The increase in other income is primarily due to increased
ATM surcharges and deposit account related charges.
For the nine month period ended September 30, 1999, total other (non-interest)
income, reflects an increase of $111,000 or 16.1 percent compared with the
comparable nine month period ended September 30, 1998. This overall increase was
primarily a result of increased service charges, commissions, and fees including
ATM surcharging which amounted to $189,000 for the nine month period ended
September 30, 1999, as compared to $155,000 in 1998. Service charge fees on
deposits increased primarily as an result of an increase in business activity.
30-September-99 Center Bancorp, Inc. Form 10Q 16
<PAGE>
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, 1999 and 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands) Three months ended Nine months ended
September 30, September 30,
Other expense: 1999 1998 % change 1999 1998 % change
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 1,749 $ 1,534 14.02 $ 5,064 $ 4,300 17.77
Occupancy expense, net 330 285 15.79 926 805 15.03
Premises & equipment expense 303 317 (4.42) 966 871 10.91
Stationery and printing expense 82 130 (36.92) 356 317 12.30
Marketing & Advertising 116 161 (27.95) 419 363 15.43
Other expenses 767 674 13.80 2,060 1,865 10.46
-------- ------- ------- ------- ------- -------
Total other expense $ 3,347 $ 3,101 7.93 $ 9,791 $ 8,521 14.90
==================================== ======== ======= ======= ======= ======= =======
</TABLE>
For the three month period ended September 30, 1999 total other (non-interest)
expenses increased $246,000 or approximately 7.9 percent over the comparable
three month period ended September 30, 1998. Increases in salaries and employee
benefits coupled with increases in occupancy and other expenses comprised the
primary components of the total increase for the three month period ended
September 30, 1999. 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, 1999 was 63.4 percent as
compared with 63.0 percent for the comparable period ended September 30, 1998.
For the three months ended September 30, 1999 this ratio was 66.0 percent as
compared with 66.0 percent for the comparable period ended September 30, 1998.
For the nine month period ended September 30, 1999, total other (non-interest)
expenses increased $1,270,000 or 14.9 percent over the comparable period ended
September 30, 1998. This was due to continued expansion of the Bank's branch
network coupled with the expense of ongoing technological and automation
programs. Salaries, loan portfolio operating expense, telecommunication and
network expenses and employee benefits costs coupled with occupancy, stationery
and printing, marketing, and advertising, and other expenses (computer related
and correspondent bank charges, director's fees and check charge-offs) comprised
the primary components of the total increase for the period.
Salaries and employee benefits increased $215,000 or 14.0 percent for the three
months ended September 30, 1999 and $764,000 or 17.8 percent for the nine month
period over the comparable three and nine month periods ended September 30,
1998. These increases are primarily attributable to higher staffing levels,
normal merit increases, promotional raises and higher benefits costs. Staffing
levels overall increased to 163 full-time employees at September 30, 1999
compared to 152 full-time equivalent employees at September 30, 1998.
The increase in occupancy expenses reflect the associated costs of the
Corporation's expanded facilities. For the three and nine months ended September
30, 1999, occupancy expenses increased $45,000 and $121,000 over the comparable
periods in 1998 primarily related to the Corporation's Morristown banking center
opened in August 1998, Summit Banking Center opened in June 1999, and the
expanded Springfield office and rental increases on other leased locations.
Marketing and advertising expenditure decreased $45,000 for the three month
period but increased $56,000 for the nine month period ended September 30, 1999,
compared to the comparable periods in 1998. The increase in this expense
category is primarily attributable to the grand opening expenses associated with
the Corporation's Summit banking center and Springfield branch.
30-September-99 Center Bancorp, Inc. Form 10Q 17
<PAGE>
Provision for Income Taxes
For the nine month period ended September 30, 1999, the effective tax rate was
34.1 percent compared to 33.9 percent for the nine month period ended September
30, 1998. The Corporation's provision for income taxes increased for both the
three and nine months from 1999 to 1998 primarily as a result of an increase in
taxable 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.
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, 1999, the Corporation reflected a negative interest sensitivity
gap (or an interest sensitivity ratio) of 0.47:1.0 at the cumulative one year
position. During much of 1999 the Corporation had a negative interest
sensitivity gap. The maintenance of a liability-sensitive position during 1999
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 1999. No assurance
can be given that the company will be able to satisfy this objective.
30-September-99 Center Bancorp, Inc. Form 10Q 18
<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
September 30, 1999, projected to September of 2000, indicates that the Bank's
liquidity should remain strong, with an approximate projection of $110.5 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, 1999, 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, 1998. More volatile rate sensitive deposits,
concentrated in time certificates of deposit greater than $100,000 for the nine
month period ended September 30, 1999, decreased on average to 14.77 percent of
total deposits from 39.2 percent during the nine months ended September 30,
1998. This change has resulted from a $33.9 million decrease in time deposits on
average for the nine months ended September 30, 1999 compared to the prior year
period.
Average funding sources during the nine months ended September 30, 1999
increased by approximately $18.3 million compared to the same period in 1998.
The increase was due to an increase in non-interest bearing demand deposits and
short term borrowings, primarily advances from the Federal Home Loan Bank.
Non-interest bearing funding sources as a percentage of the total funding mix
increased to 18.1 percent (on average) as compared to 16.5 percent for the nine
month period ended September 30, 1998.
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 1999
were $59.3 million, an increase of $35.4 million or 148.5 percent from $23.4
million in average short-term borrowings during the comparable nine months ended
September 30, 1998. This change was due to a strategic shift from jumbo
certificates of deposit to more cost effective funding from the Federal Home
Loan Bank.
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, 1999, cash and cash equivalents (which decreased
overall by $3.6 million) were provided (on a net basis) by financing
activities($40.4 million), primarily due to a increase in borrowings of $31.0
million and deposits $10.7 million and by operating activities ($2.5 million). A
total of $46.5 million was used in net investing activities, principally a $30.5
million increase in the investment portfolio and a $14.7 million increase in
loans.
30-September-99 Center Bancorp, Inc. Form 10Q 19
<PAGE>
Stockholders' Equity
Total stockholders' equity averaged $37.2 million or 7.52 percent of average
assets for the nine month period ended September 30, 1999, as compared to $35.0
million, or 7.37 percent, during the same period in 1998. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $380,000 in
new capital for the nine months ended September 30, 1999 as compared with
$459,000 for the comparable period in 1998. Tangible book value per common
share, after the 5% stock dividend paid June 1, 1999 and the 3-for-2 stock split
paid May 1998, was $9.73 at September 30, 1999 as compared to $8.94 at December
31, 1998. Tangible book value per common share was $9.76 at September 30, 1998,
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, 1999, 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, 1999, total Tier l capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $34.9
million or 6.83 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $866,000 of net unrealized loss, after tax, on
securities available-for-sale (included as a component of other comprehensive
income) and goodwill of approximately $2.8 million as of September 30, 1999. At
September 30, 1999, 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, 1999. Under 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, 1999, management believes that the Bank meets
all capital adequacy requirements to which it is subject.
30-September-99 Center Bancorp, Inc. Form 10Q 20
<PAGE>
Year 2000 Century Date Change
In May 1998, 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 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 30, 1999, management has completed all phases of the plan,
including identification, modification, and testing. Management believes that
the Corporation is currently compliant with regulatory milestone dates. At
present, total costs to the Corporation of achieving Year 2000 compliance are
estimated at $470,000 of which the Corporation has incurred $422,000 as of
September 30, 1999. Approximately 75 to 80 percent has been invested in new
technology while the remainder approximates the amount of direct expense.
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 completed the evaluation process
necessary to formulate a comprehensive contingency plan.
As part of the contingency planning, the Corporation implemented a due diligence
process that identified significant customers, and third parties posing material
Year 2000 risks, evaluated their Year 2000 preparedness, assessed their Year
2000 risk and considered appropriate risk controls. The contingency planning
process was completed during the fourth quarter of 1998 and implementation of
the various components of the contingency plan was achieved during the second
quarter of 1999. Management's goal to be compliant with regulatory guidelines by
June 1999 was achieved, although no assurances can be given that the
Corporation's information technology systems or those of a third party on which
the Corporation relies will be Year 2000 compliant by the 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, including a failure by suppliers, distributors and
other third parties to successfully address Year 2000 issues, could have a
material adverse affect on the Corporation's business, operations, liquidity, or
financial condition. Any projections herein regarding Year 2000 compliance
constitute a forward-looking statement, under the Private Securities Litigation
Reform Act of 1995. Actual results could differ materially from the
Corporation's forward-looking statements 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.
30-September-99 Center Bancorp, Inc. Form 10Q 21
<PAGE>
Item 3 Qualitative and Quantitative Disclosures about Market Risks
The primary market risk faced by the Corporation is interest rate risk. The
Corporation's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
response to changing market and rate conditions.
The Corporation's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest in alternative interest rate scenarios. Management reviews
and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Corporation's model projects a 200
basis point change in rates during the first year, in even monthly increments,
with rates held constant in the second year. The Corporation's ALCO has
established that interest income sensitivity will be considered acceptable if
net interest income in the above interest rate scenario is within 10% of net
interest income in the flat rate scenario in the first year and within 20% over
the two year time frame. At September 30, 1999, the Corporation's income
simulation model indicates an acceptable level of interest rate risk, with no
significant change from December 31, 1998.
Management also monitors interest rate risk by utilizing a market value of
equity model. The model computes estimated changes in net portfolio value
("NPV") of its cash flows from the Corporation's assets and liabilities in the
event of a change in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities. This analysis assesses the risk of gain or loss in market
risk sensitive instruments in the event of an immediate and sustained 200 basis
point increase or decrease in market interest rates. The Corporation's ALCO
policy indicates that the level of interest rate risk is acceptable if the
immediate 200 basis point change in interest rates would not result in the loss
of more than 25% from the base market value of equity. At September 30, 1999,
the market value of equity indicates an acceptable level of interest rate risk,
with no significant change since December 31, 1998.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and duration of deposits, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions that ALCO could undertake in response to changes in interest rates.
30-September-99 Center Bancorp, Inc. Form 10Q 22
<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, results of operations, or liquidity of the Corporation. This
statement represents a forward-looking statement under the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from this
statement, primarily due to the uncertainties involved in legal processes.
Item 2 Changes in Securities
On April 13, 1999, the Board of Directors of the registrant declared a 5% stock
dividend on the common stock of the Corporation, payable on June 1, 1999 to
stockholders of record on May 18, 1999. All share data has been retroactively
adjusted for the common stock dividend.
Item 6 Exhibits and Reports on Form 8-K
A) Exhibits: Exhibit (27-1) - Center Bancorp, Inc.
Financial Data Schedule - September 30, 1999
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the
three months ended September 30, 1999.
30-September-99 Center Bancorp, Inc. Form 10Q 23
<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 12, 1999 /s/ Anthony C. Weagley
---------------------------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
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