<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.
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.
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(exact name of registrant as specified in its charter)
New Jersey 52-1273725
- -----------------------------------------------------------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) identification No.)
2455 Morris Avenue, Union, NJ 07083-0007
(Address of Principal Executive Offices, Including Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
Securities registered
pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of class)
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. YesX or No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 5-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to the
Form 10-K .X
Aggregate Market value of voting stock held by non-affiliates based on the
average of Bid and Asked prices on February 29, 2000 was approximately $54.2
Million.
Shares outstanding on February 29, 2000
- ---------------------------------------
Common stock no par value 3,794,477 shares
Parts of Form 10-K in which
Documents Incorporated by reference document is incorporated
Definitive proxy statement dated March 17, 2000
in connection with the 2000 Annual Stockholders
Meeting filed with the Commission pursuant to
Regulation 14A.......................................... Part III
Annual Report to Stockholders for the fiscal
year ended December 31, 1999............................ Part I and Part II
<PAGE>
INDEX TO FORM 10-K
PART I
ITEM 1 BUSINESS 1
ITEM 2 PROPERTIES 9-10
ITEM 3 LEGAL PROCEEDINGS 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT 10
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6 SELECTED FINANCIAL DATA 11
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 11
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 11
PART III
ITEM 10 DIRECTORS OF THE REGISTRANT 12
ITEM 11 EXECUTIVE COMPENSATION 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 12
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 13-14
SIGNATURES 15
<PAGE>
Center Bancorp, Inc.
Form 10 K
Part I
Item I-Business
A) Historical Development Of Business
Center Bancorp, Inc., a one-bank holding company, was incorporated in the state
of New Jersey on November 12, 1982. Center Bancorp, Inc. commenced operations on
May 1, 1983, upon the acquisition of all outstanding shares of The Union Center
National Bank (the "Bank"). The holding company's sole activity, at this time,
is to act as a holding company for the Bank. As used herein, the term
"Corporation" shall refer to Center Bancorp, Inc. and its subsidiary and the
term "Parent Corporation" shall refer to Center Bancorp, Inc. on an
unconsolidated basis.
The Bank was organized in 1923 under the law of the United States of America.
The Bank operates five offices in Union Township, Union County, New Jersey, one
office in Summit, Union County, New Jersey, one office in Springfield Township,
Union County, New Jersey, one office in Berkeley Heights, Union County, New
Jersey, one office in Madison, Morris County, New Jersey and one office in
Morristown, Morris County, New Jersey and currently employs 162 full time
equivalent persons. The Bank is a full service commercial bank offering a
complete range of individual and commercial services.
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA ("Lehigh"), a
New Jersey chartered savings & loan association, in a transaction accounted for
under the purchase method of accounting. At June 28, 1996, Lehigh Savings Bank
SLA had assets of $70.9 million (primarily cash and cash equivalents of $53.0
million and loans of $15.0 million), deposits of $68.2 million and stockholders'
equity of $2.7 million. The Corporation paid a total of $5.5 million in cash for
Lehigh resulting in goodwill of $3.8 million. The goodwill is being amortized on
a straight-line basis over 15 years. The consolidated financial statements of
the Corporation include the assets, liabilities, and results of operations of
Lehigh since the acquisition date.
B)Narrative Description Of Business
The Bank offers a broad range of lending, depository and related financial
services to commercial, industrial and governmental customers. In 1999, the Bank
obtained full trust powers enabling it to offer a variety of trust services to
its customers. In the lending area, these services include short and medium term
loans, lines of credit, letters of credit, working capital loans, real estate
construction loans and mortgage loans. In the depository area, the Bank offers
demand deposits, savings accounts and time deposits. In addition, the Bank
offers collection services, wire transfers, night depository and lock box
services.
The Bank offers a broad range of consumer banking services, including interest
bearing and non-interest bearing checking accounts, savings accounts, money
market accounts, certificates of deposit, IRA accounts, Automated Teller
Machines ("ATM") accessibility using Money AccessTM service, secured and
unsecured loans, mortgage loans, home equity lines of credit, safe deposit
boxes, Christmas club accounts, vacation club accounts, collection services,
money orders and traveler's checks.
The Bank offers various money market services. It deals in U.S. Treasury and
U.S. Governmental agency securities, certificates of deposits, commercial paper
and repurchase agreements.
Competitive pressures affect the Corporation's manner of conducting business.
Competition stems not only from other commercial banks but also from other
financial institutions such as savings banks, savings and loan associations,
mortgage companies, leasing companies and various other financial service and
advisory companies. Many of the financial institutions operating in the
Corporation's primary market are substantially larger and offer a wider variety
of products and services than the Corporation.
The Parent Corporation is subject to regulation by the Board of Governors of the
Federal Reserve System and the New Jersey Department of Banking. As a national
bank, the Bank is subject to regulation and periodic examination by the
Comptroller of the Currency. Deposits in the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC").
1
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The Parent Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the Bank Holding Company Act of 1956, as amended (the
"Act"). In addition, the Federal Reserve Board makes periodic examinations of
bank holding companies and their subsidiaries. The Act requires each bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire substantially all of the assets of any bank, or before it may
acquire ownership or control of any voting shares of any bank, if, after such
acquisition, it would own or control, directly or indirectly, more than 5
percent of the voting shares of such bank. The Act also restricts the types of
businesses and operations in which a bank holding company and its subsidiaries
may engage.
The operations of the Bank are subject to requirements and restrictions under
federal law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted, limitations
on the types of investments that may be made and the types of services which may
be offered. Various consumer laws and regulations also affect the operations of
the Bank. Approval of the Comptroller of the Currency is required for branching,
bank mergers in which the continuing bank is a national bank and in connection
with certain fundamental corporate changes affecting the Bank. Federal law also
limits the extent to which the Parent Corporation may borrow from the Bank and
prohibits the Parent Corporation and the Bank from engaging in certain tie-in
arrangements.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
substantially revised the bank regulatory provisions of the Federal Deposit
Insurance Act and several other federal banking statutes. Among other things,
FDICIA requires federal banking agencies to broaden the scope of regulatory
corrective action taken with respect to banks that do not meet minimum capital
requirements and to take such actions promptly in order to minimize losses to
the FDIC. Under FDICIA, federal banking agencies have established five capital
tiers: "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized".
Under regulations adopted under these provisions, for an institution to be well
capitalized it must have a total risk-based capital ratio of at least 10
percent, a Tier I risk-based capital ratio of at least 6 percent and a Tier I
leverage ratio of at least 5 percent and not be subject to any specific capital
order or directive. For an institution to be adequately capitalized, it must
have a total risk-based capital ratio of at least 8 percent, a Tier I risk-based
capital ratio of at least 4 percent and a Tier I leverage ratio of at least 4
percent (or in some cases 3 percent). Under the regulations, an institution will
be deemed to be undercapitalized if the bank has a total risk-based capital
ratio that is less than 8 percent, a Tier I risk-based capital ratio that is
less than 4 percent or a Tier I leverage ratio of less than 4 percent (or in
some cases 3 percent). An institution will be deemed to be significantly
undercapitalized if the bank has a total risk-based capital ratio that is less
than 6 percent, a Tier I risk-based capital ratio that is less than 3 percent,
or a Tier I leverage ratio of less than 3 percent and will be deemed to be
critically undercapitalized if it has a ratio of tangible equity to total assets
that is equal to or less than 2 percent.
FDICIA also directs that each federal banking agency prescribe standards for
depository institutions and depository institution holding companies relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, a
maximum ratio of classified assets to capital, a minimum ratio of market value
to book value for publicly traded shares (if feasible) and such other standards
as the agency deems appropriate.
FDICIA also contains a variety of other provisions that could affect the
operations of the Corporation, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, the
requirement that depository institutions give 90 days notice to customers and
regulatory authorities before closing any branch, limitations on credit exposure
between banks, restrictions on loans to a bank's insiders and guidelines
governing regulatory examinations.
2
<PAGE>
BIF Premiums and Recapitalization of SAIF
The Corporation is a member of the Bank Insurance Fund ("BIF") of the FDIC. The
FDIC also maintains another insurance fund, the Savings Association Insurance
Fund ("SAIF"), which primarily covers savings and loan association deposits but
also covers deposits that are acquired by a BIF-insured institution from a
savings and loan association ("Oakar deposits"). The Corporation had
approximately $385.3 million of deposits at December 31, 1999, with respect to
which it pays SAIF FICO Assessments.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act") signed
into law on September 30, 1996, included the Deposit Insurance Funds Act of 1996
(the "Funds Act") under which the FDIC was required to impose special
assessments on SAIF-assessable deposits to recapitalize the SAIF. Under the
Funds Act, the FDIC also changed assessments for SAIF and BIF deposits in a 5 to
1 ratio to pay Financing Corp. ("FICO") bonds until January 1, 2000. A FICO rate
of approximately 1.29 basis points was charged on BIF deposits, and
approximately 6.44 basis points was on SAIF deposits.
The Gramm-Leach-Bliley Act Of 1999
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (the "Act") which among other things, permits qualifying bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. The Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Board has determined to be closely related to banking. A
qualifying national bank also may engage subject to limitations on investment,
in activities that are financial in nature, other than insurance underwriting,
insurance company portfolio investment, real estate development, and real estate
investment, through a financial subsidiary of the bank.
Proposed Legislation
From time to time proposals are made in the U.S. Congress and before various
bank regulatory authorities which would alter the policies of and place
restrictions on different types of banking operations. It is impossible to
predict the impact, if any, of potential legislative trends on the business of
the Corporation and the Bank.
C) Dividend Restrictions
Most of the revenue of the Corporation available for payment of dividends on its
capital stock will result from amounts paid to the Parent Corporation by the
Bank. There are a number of statutory and regulatory restrictions applicable to
the payment of dividends by national banks and bank holding companies. First,
the Bank must obtain the approval of the Comptroller of the Currency (the
"Comptroller") if the total dividends declared by the Bank in any year will
exceed the total of the Bank's net profits (as defined and interpreted by
regulation) for that year and retained profits (as defined) for the preceding
two years, less any required transfers to surplus. Second, the Bank cannot pay
dividends except to the extent that net profits then on hand exceed statutory
bad debts. Third, the authority of federal regulators to monitor the levels of
capital maintained by the Corporation and the Bank (see Item 7 of this Annual
Report on Form 10-K and the discussion of FDICIA above), as well as the
authority of such regulators to prohibit unsafe or unsound practices, could
limit the amount of dividends which the Parent Corporation and the Bank may pay.
Regulatory pressures to reclassify and charge-off loans to establish additional
loan loss reserves also can have the effect of reducing current operating
earnings and thus impacting an institution's ability to pay dividends.
Regulatory authorities have indicated that bank holding companies which are
experiencing high levels of non-performing loans and loan charge-offs should
review their dividend policies. Reference is also made to Note 13 of the Notes
to the Corporation's Consolidated Financial Statements included in the 1999
Annual Report incorporated herein by reference.
D) Statistical Information
(Reference is also made to Exhibit 13.1 of this Annual Report on Form 10-K)
Information regarding interest sensitivity is incorporated by reference to pages
24 through 26 of the 1999 Annual Report to Shareholders (the 1999 Annual
Report).
Information regarding related party transactions is incorporated by reference to
Note 5 of the Notes to the Corporation's Consolidated Financial Statements
included in the 1999 Annual Report incorporated herein by reference.
3
<PAGE>
The market risk results and gap results noted on pages 24 through 26 of the 1999
Annual Report take into consideration repricing and maturities of assets and
liabilities, but fail to consider the interest sensitivities of those asset and
liability accounts. Management has prepared for its use an income simulation
model to forecast future net interest income, in light of the current gap
position. Management has also prepared for its use alternative scenarios to
measure levels of net interest income associated with various changes in
interest rates. Results have indicated that an interest rate increase of 200
basis points and a decline of 200 basis resulted in an impact on future net
interest income which is consistent with target levels contained in the
Corporation's Asset/Liability Policy. Management cannot provide any assurances
about the actual effect of changes in interest rates on the Corporation's net
income.
I. Investment Portfolio
a) For information regarding the carrying value of the investment portfolio,
see pages 39 and 40 of the 1999 Annual Report which is incorporated herein
by reference. b) The following table illustrates the maturity distribution
and weighted average yield on a tax-equivalent basis for investment
securities at December 31, 1999, on a contractual maturity basis.
<TABLE>
<CAPTION>
Obligations Other Securities,
of US Obligations Federal Reserve
Treasury & of States and Federal
Government & Political Home Loan
(Dollars in Thousands) Agencies Subdivisions Bank Stock Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in 1 year or less
Amortized Cost $ 98,261 $ 10,118 $ 3,999 $ 112,378
Market Value 92,940 10,114 4,002 107,056
Weighted Average Yield 6.765% 6.308% 6.705% 6.722%
Due after one year through five years
Amortized Cost $ 87,869 $ 23,202 $ 29,903 $ 140,974
Market Value 85,712 22,960 29,405 138,077
Weighted Average Yield 6.550% 6.586% 6.530% 6.552%
Due after five years through ten years
Amortized Cost $ 7,596 $ 17,293 $ 498 $ 25,387
Market Value 7,374 16,343 476 24,193
Weighted Average Yield 6.439% 6.783% 6.250% 6.669%
Due after ten years
Amortized Cost $ 21,564 $ 0 $ 0 $ 21,564
Market Value 20,944 0 0 20,944
Weighted Average Yield 6.645% 0.000% 0.000% 6.645%
No Maturity
Amortized Cost $ 0 $ 0 $ 6,762 $ 6,762
Market Value 0 0 6,762 6,762
Weighted Average Yield 0.000% 0.000% 6.493% 6.493%
- ---------------------------------------------------------------------------------------------------------
Total
Amortized Cost $ 215,290 $ 50,613 $ 41,162 $ 307,065
Market Value 206,970 49,417 40,645 297,032
Weighted Average Yield 6.654% 6.597% 6.537% 6.629%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
c) Securities of a single issuer exceeding 10 percent of stockholders' equity
amounted to $14.3 million - for 1999 at December 31, 1999 and are listed in the
table below:
<TABLE>
<CAPTION>
Aggregate
(Dollars in thousands) Issuer Book Value Market Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Citi Group $ 4,498 $ 4,392
California Housing Authority $ 4,400 $ 4,095
Federal Home Loan Bank Stock $ 5,423 $ 5,423
- ---------------------------------------------------------------------------------------------------------
Total $ 14,321 $ 13,910
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</TABLE>
For other information regarding the Corporation's investment securities
portfolio, see Pages 17, 18, 39 and 40 of the 1999 Annual Report.
4
<PAGE>
II. Loan Portfolio
The following table presents information regarding the components of the
Corporation's loan portfolio on the dates indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Commercial $ 61,861 $ 52,182 $ 39,397 $ 25,950 $ 21,302
Real estate-mortgage 99,800 91,189 88,067 85,994 69,954
Installment and other 7,669 7,060 5,565 6,584 7,012
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Total 169,330 150,431 133,029 118,528 98,268
Less:
Unearned discount 241 332 605 698 698
Allowance for loan losses 1,423 1,326 1,269 1,293 1,073
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Net total $ 167,666 $ 148,773 $ 131,155 $ 116,537 $ 96,497
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</TABLE>
Since 1995, demand for the Bank's commercial loan, commercial real estate and
real estate mortgage products improved gradually. Business development and
marketing programs coupled with positive market trends supported the growth, in
1996, 1997, 1998 and 1999. The Lehigh acquisition also accounted for a portion
of 1996 loan growth approximating $15.2 million.
The maturities of commercial loans at December 31, 1999 are listed below.
<TABLE>
<CAPTION>
At December 31, 1999, Maturing
----------------------------------------------------------------------
After One Year
In One Year Through After
(Dollars in thousands) Or Less Five Years Five Years Total
- ---------------------- ----------- -------------- ---------- -----
<S> <C> <C> <C> <C>
Construction loans $ 284 $ 86 $ 0 $ 370
Commercial real estate loans 1,249 2,305 20,560 24,114
Commercial loans 17,224 7,579 12,574 37,377
------- ------- ------- -------
Total $18,757 $ 9,970 $33,134 $61,861
======= ======= ======= =======
Loans with:
Fixed rates $ 818 $ 8,177 $33,134 $42,129
Variable rates 17,939 $ 1,793 $ 0 19,732
------- ------- ------- -------
Total $18,757 $ 9,970 $33,134 61,861
======= ======= ======= =======
</TABLE>
Lending is one of Center Bancorp's primary business activities. The
Corporation's loan portfolio consists of both retail and commercial loans,
serving the diverse customer base in its market area. In 1999, average total
loans comprised 34.1 percent of average interest-earning assets. The Corporation
has experienced a compound growth rate in average loans since 1995 of 11.4
percent. Average loans amounted to $160.2 million in 1999 compared with $139.0
million in 1998 and $125.5 million in 1997. The composition of Center Bancorp's
loan portfolio continues to change due to the local economy. Factors such as the
economic climate, interest rates, real estate values and employment all
contribute to these changes. Loan growth has been generated through business
development efforts and entry through branching into new markets.
Average commercial loans increased approximately $5.9 million or 21.8 percent in
1999 as compared with 1998. The Corporation seeks to create growth in commercial
lending by offering customized products, competitive pricing and by capitalizing
on the positive trends in its market area. Specialized products are offered to
meet the financial requirements of the Corporation's clients. It is the
objective of the Corporation's credit policies to diversify the commercial loan
portfolio to limit concentrations in any single industry.
The Corporation's commercial loan portfolio includes, in addition to real estate
development, loans to the manufacturing, services, automobile, professional and
retail trade sectors, and to specialized borrowers, including high technology
businesses. A large proportion of the Corporation's commercial loans have
interest rates which reprice with changes in short-term market interest rates or
mature in one year or less.
5
<PAGE>
Average mortgage loans, which amounted to $95.3 million in 1999, increased $8.9
million or 10.3 percent as compared with average mortgage loans of $86.4 million
in 1998 (which reflected a 7.2 percent increase over 1997). The Corporation's
long-term mortgage portfolio includes both residential and commercial financing.
Growth during the past two years largely reflected brisk activity in mortgage
financing. Although a portion of the Corporation's commercial mortgages adjust
to changes in the prime rate, as well as indices tied to 5 year Treasury Notes,
most of these loans and residential mortgage loans have fixed interest rates.
Residential loans increased steadily in 1995 and in 1996; the increase was
attributable to the Lehigh acquisition. During 1998 growth increased as rates
stabilized with similar trends experienced during 1999. During 1998 and 1999
growth was affected by refinancing activity, competition among lenders and
rising interest rates during the second half of 1999.
Average construction loans and other temporary mortgage financing decreased from
1998 to 1999 by $173,000 to $594,000. Such loans increased by $209,000 from 1997
to 1998. The change in construction and other temporary mortgage lending has
been generated by the market activity of the Corporation's customers engaging in
residential and commercial development throughout New Jersey. Interest rates on
such mortgages are generally tied to key short-term market interest rates. Funds
are typically advanced to the builder or developer during various stages of
construction and upon completion of the project it is contemplated that the
loans will be repaid by cash flows derived from the ongoing project.
Loans to individuals include personal loans, student loans, and home improvement
loans, as well as financing for automobiles and other vehicles. Such loans
averaged $7.7 million in 1999, as compared with $7.1 million in 1998 and $5.6
million in 1997. The growth in loans to individuals, during 1999, was buoyed by
increases in personal loans, offset in part by sales of student loans and
declines in automobile loans.
Home equity loans, which the Corporation has been actively promoting since 1994,
as well as traditional secondary mortgage loans, have become popular with
consumers due to their tax advantages over other forms of consumer borrowing
vehicles. Home equity loans and secondary mortgages averaged $27.5 million in
1999, an increase of $6.0 million or 27.9 percent as compared with average home
equity loans of $21.5 million in 1998. Interest rates on floating rate home
equity loans are generally tied to the prime rate while most other loans to
individuals, including fixed rate home equity loans, are medium-term (ranging
between one-to-five years) and carry fixed interest rates.
At December 31,1999, the Corporation had total lending commitments outstanding
of $37.0 million, of which approximately 43.0 percent and 21.1 percent were for
commercial loans and commercial real estate and construction loans,
respectively.
Credit risks are an inherent part of the lending function. The Corporation has
set in place specific policies and guidelines to limit credit risks to the
degree possible. The following describes the Corporation's credit management
policy and describes certain risk elements in its earning assets portfolio.
Credit Management. The maintenance of comprehensive and effective credit
policies is a paramount objective of the Corporation. Credit procedures are
enforced at each individual branch office and are maintained at the senior
administrative level as well as through internal control procedures.
Prior to extending credit, the Corporation's credit policy generally requires a
review of the borrower's credit history, collateral and purpose of each loan.
Requests for most commercial and financial loans are to be accompanied by
financial statements and other relevant financial data for evaluation. After the
granting of a loan or lending commitment, this financial data is typically
updated and evaluated by the credit staff on a periodic basis for the purpose of
identifying potential problems. Construction financing requires a periodic
submission by the borrowers of sales/leasing status reports regarding their
projects, as well as, in some cases, inspections of the project sites by
independent engineering firms. Advances are normally made only upon the
satisfactory completion of periodic phases of construction.
Certain lending authorities are granted to loan officers based upon each
officer's position and experience. However, large dollar loans and lending lines
are reported to and are subject to the approval of the Bank's loan committee
and/or board of directors. Loan committees are chaired by either the president
or a senior officer of the Bank.
6
<PAGE>
The Corporation has established its own internal loan-to-value limits for real
estate loans. In general, except as described below, these internal limits are
not permitted to exceed the following supervisory limits.
Loan Category Loan-to-Value Limit
Raw Land 65%
Land Development 75%
Construction:
Commercial, Multifamily *,
and other Nonresidential 80%
Improved Property 85%
Owner-occupied 1 to 4 family and home equity **
* Multifamily construction includes condominiums and cooperatives.
** A loan-to-value limit has not been established for permanent mortgage
or home equity loans on owner-occupied, 1 to 4 family residential
property. However, for any such loan with a loan-to-value ratio that
equals or exceeds 90 percent at origination, an institution is expected
to require appropriate credit enhancement in the form of either
mortgage insurance or readily marketable collateral.
It may be appropriate in individual cases to originate loans with loan-to-value
ratios in excess of the supervisory loan-to-value limits, based on the support
provided by other credit factors. The President or Board of Directors must
approve such exceptions. These loans must be identified by the Bank as
exceptions to the supervisory limits and their aggregate amount must be reported
at least quarterly to the Board of Directors. Non-conforming loans should not
exceed 100% of capital, or 30% with respect to non 1 to 4 family residential
loans.
Collateral margin guidelines are based on cost, market, or other appraised value
to maintain a reasonable amount of collateral protection in relation to the
inherent risk in the loan. This does not mitigate the fundamental analysis of
cash flow from the conversion of assets in the normal course of business or from
operations to repay the loan. It is merely designed to provide a cushion to
minimize the risk of loss if the ultimate collection of the loan becomes
dependent on the liquidation of security pledged.
The Corporation also seeks to minimize lending risk through loan
diversification. The composition of the Corporation's commercial loan portfolio
reflects and is highly dependent upon the economy and industrial make-up of the
region it serves. Effective loan diversification spreads risk to many different
industries, thereby reducing the impact of downturns in any specific industry on
overall loan profitability.
Weakening credits are monitored through a loan review process which requires
that, on a regular basis, a classified loan report is prepared. Classified loans
are categorized into one of several categories depending upon the condition of
the borrower and the strength of the underlying collateral. "Other assets
especially mentioned" is an early warning signal consisting of loans with only
modest deficiencies in documentation or with potentially weakening credit
features.
A consolidated classified loan report is prepared on a monthly basis and is
examined by both the senior management of the Bank and the Corporation's Board
of Directors. The review of classified loan reports is designed to enable
management to take such action as is considered necessary to remedy problems on
a timely basis.
Regularly scheduled audits performed by the Corporation's internal and external
credit review staff further the integrity of the credit monitoring process. Any
noted deficiencies are expected to be corrected within a reasonable period of
time.
Risk Elements. Risk elements include non-performing loans, loans past due ninety
days or more as to interest or principal payments but not placed on a
non-accrual status, potential problem loans, other real estate owned, net, and
other non-performing interest-earning assets.
7
<PAGE>
Non-performing and Past Due Loans, OREO. Non-performing loans include
non-accrual loans and troubled debt restructurings non-accrual Loans represent
loans on which interest accruals have been suspended. It is the Corporation's
general policy to consider the charge-off of loans when they become
contractually past due ninety days or more as to interest or principal payments
or when other internal or external factors indicate that collection of principal
or interest is doubtful. Troubled debt restructurings represent loans on which a
concession was granted to a borrower, such as a reduction in interest rate which
is lower than the current market rate for new debt with similar risks. At
December 31, 1999, other real estate owned (OREO) consisted of a closed branch
facility with a carrying value of approximately $73,000.
Loans accounted for on a non-accrual basis at December 31, 1999, 1998, 1997,
1996, and 1995 are as follows.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage Real Estate $ 269 $ 38 $ 27 $ 298 $ 0
Commercial 0 0 0 0 0
Installment 23 3 0 0 0
--------------------------------------------------------------------------------
Total non-accrual loans $ 292 $ 41 $ 27 $ 298 $ 0
--------------------------------------------------------------------------------
</TABLE>
Accruing loans which are contractually past due 90 days or more as to principal
or interest payments are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 0 $ 0 $ 0 $ 11 $ 0
Installment 0 24 73 110 48
-----------------------------------------------------------------------------------
Total $ 0 $ 24 $ 73 $ 121 $ 48
-----------------------------------------------------------------------------------
</TABLE>
There were no loans which are "troubled debt restructurings" as of the last day
of each of the last five years.
In general, it is the policy of management to consider the charge-off of loans
at the point that they become past due in excess of 90 days, with the exception
of loans that are secured by cash or marketable securities or mortgage loans
which are in the process of foreclosure.
There were no other known "potential problem loans" (as defined by SEC
regulations) as of December 31, 1999 that have not been identified and
classified. Classified loans, consisting of other assets especially mentioned
and substandard loans, amounted to $2,572,534 and $519,021, respectively, at
December 31, 1999. On March 21, 2000, a $500,000 loan classified as substandard
at December 31, 1999, was repaid in full by the borrower. At December 31, 1998
these loans amounted to $119,440 and $75,670 respectively. The Corporation has
no foreign loans.
As of December 31, 1999, $8.6 million of the commercial loan portfolio, or 23.0
percent of $37.4 million, represented outstanding working capital loans to
various real estate developers. All but $4.4 million of these loans are secured
by mortgages on land and on buildings under construction.
III. Allowance for Loan Losses
Implicit in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan being
made, the creditworthiness of the borrower and prevailing economic conditions.
The allowance for loan losses has been allocated below according to the
estimated amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the following categories of loans at
December 31, for each of the past five years. The table below shows, for three
types of loans, the amounts of the allowance allocable to such loans and the
percentage of such loans to total loans. The percentage of loans to total loans
is based upon the classification of loans shown on page 5 of this report.
8
<PAGE>
<TABLE>
<CAPTION>
Commercial Real Estate Mortgage Installment Unallocated
---------- -------------------- ----------- -----------
Amount Loans to Amount Loans to Amount Loans to Amount
Total Loans Total Loans Total Loans
(Dollars in thousands) % %
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ 718 36.6 $ 492 58.9 $155 4.5 $ 58
1998 $ 553 34.7 $ 330 60.6 $ 66 4.7 $ 377
1997 $ 498 29.6 $ 262 66.2 $ 56 4.2 $ 453
1996 $ 415 21.9 $ 220 66.1 $ 62 12.0 $ 596
1995 $ 467 21.7 $ 187 71.2 $ 22 7.1 $ 397
</TABLE>
Information regarding charge-offs and recoveries is incorporated by reference to
page 20 of the 1999 Annual Report.
IV. Deposits
Information regarding average amounts/rates of deposits is incorporated by
reference to pages 26 and 31 of the 1999 Annual Report. Information regarding
the amount of time certificates of deposit of $100,000 or more is presented on
pages 26, 31, and 32 of the 1999 Annual Report.
V. Return on Equity and Assets
Information regarding the return on average assets, return on average equity,
the equity to assets ratio and dividend payout ratio is incorporated by
reference to pages 1 and 13 of the 1999 Annual Report. Return on average assets
was 0.92 percent, 0.88 percent and 0.94 percent for the years ended December 31,
1999, 1998 and 1997, respectively. The dividend payout ratio was 47.8 percent,
48.5 percent and 41.3 percent for the years ended December 31, 1999, 1998 and
1997, respectively. Return on tangible average shareholders equity was 13.5
percent in 1999, compared with 12.9 percent for 1998 and 15.9 percent in 1997.
Average shareholders equity as a percent of average assets was 7.43 percent,
7.49 percent and 6.65 percent for the years ended December 31, 1999, 1998 and
1997, respectively.
VI. Short-term Borrowings
Information regarding the amount outstanding of short-term borrowings is
incorporated by reference to page 28 of the 1999 Annual Report.
ITEM 2-Properties
The Bank's operations are located at five sites in Union Township, one in
Springfield Township, one in Berkeley Heights, one in Vauxhall and one in Summit
, Union County, New Jersey. The Bank also has one site in Madison, and one site
in Morristown, Morris County, New Jersey. The principal office is located at
2455 Morris Avenue, Union, Union County, New Jersey. The principal office is a
two story building constructed in 1993.
Five of the locations are owned by the Bank and six of the locations are leased
by the Bank. The lease of the Five Points Branch located at 356 Chestnut Street,
Union, New Jersey expires November 30, 2002 and is subject to renewal at the
Bank's option. The lease of the Career Center Branch located in Union High
School expires December 31, 2002 and is also subject to renewal at the Bank's
option and the lease of the Madison office located at 300 Main Street, Madison,
New Jersey expires June 6, 2005 and is subject to renewal at the Bank's option.
The lease of the Millburn Mall Branch located at 2933 Vauxhall Road, Vauxhall,
New Jersey expires February 01, 2003 and is subject to renewal at the Bank's
option and the lease of the Morristown office located at 86 South Street, Suite
2A, Morristown, New Jersey expires February 28, 2003 and is subject to renewal
at the Bank's option. The lease of the Summit branch located 392 Springfield
Avenue, Summit, New Jersey expires March 31, 2009 and is subject to renewal at
the Bank's option. (See page the inside of back cover of the 1999 Annual Report
for a complete listing of all branches and locations. The Drive In/Walk Up
located at 2022 Stowe Street, Union, New Jersey is adjacent to a part of the
Main Office facility.) The Bank has two off-site ATM's, one at Union Hospital,
100 Galloping Hill Road, Union, New Jersey and one at Union County College, 1033
Springfield Avenue, Cranford, New Jersey.
On November 14, 1999, the Corporation executed a Purchase Agreement with the
Town of Morristown , New Jersey in the amount of $751,000 to purchase at public
auction property located at 214 South Street, At that date, the Corporation
deposited the sum of $50,000 with the Town Officer conducting the Auction.
9
<PAGE>
ITEM 3-Legal Proceedings
There are no significant pending legal proceedings involving the Parent
Corporation or Bank other than those arising out of routine operations.
Management does not anticipate that the ultimate liability, if any, arising out
of such litigation will have a material effect on the financial condition or
results of operations of the Parent Corporation and Bank on a consolidated
basis. Such statement constitutes a forward-looking statement under the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from this statement as a result of various factors, including the uncertainties
arising in proving facts within the Judicial System.
ITEM 4-Submission of Matters to a Vote of Security Holders
The Corporation had no matter submitted to a vote of security holders during the
fourth quarter of 1999.
ITEM 4 A-Executive Officers
The following table sets forth the name and age of each executive officer of the
Parent Corporation, the period during which each such person has served as an
officer of the Parent Corporation or the Bank and each such person's business
experience (including all positions with the Parent Corporation and the Bank)
for the past five years:
<TABLE>
<CAPTION>
Name and Age Officer Since Business Experience
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
John J. Davis 1982 the Parent Corporation President & Chief Executive Officer
Age - 57 1977 the Bank of the Parent Corporation and the Bank
Anthony C. Weagley 1996 the Parent Corporation Vice President & Treasurer of the Parent
Corporation
Age - 38 1995 the Bank Senior Vice President & Cashier (1996-Present),
1985 the Bank Vice President & Cashier (1991 - 1996) and
Assistant Vice President prior years of the Bank
Donald Bennetti 1996 the Parent Corporation: Vice President of the Parent Corporation
Age - 56 1990 the Bank Senior Vice President (1997-Present)
Vice President (1993-1997)
Assistant Vice President (1992-1993) and
Assistant Cashier (1990-1992) of the Bank
Robert J. Diesner 1998 the Parent Corporation Vice President of the Parent Corporation
Age - 52 1996 the Bank Senior Vice President & Senior Loan Officer
(1998-Present)
Vice President (1997-1998) and
Assistant Vice President (1996-1997) of the Bank
John F. McGowan 1998 the Parent Corporation Vice President of the Parent Corporation
Age - 53 1996 the Bank Senior Vice President ( 1998-Present) and
Vice President (1996-1998) of the Bank
Lori A. Wunder 1998 the Parent Corporation Vice President of the Parent Corporation
Age - 36 1995 the Bank Senior Vice President (1998-Present)
Vice President (1997-1998)
Assistant Vice President (1996-1997) and
Assistant Cashier (1995-1996) of the Bank
Julie D'Aloia 1998 the Parent Corporation Secretary of the Parent Corporation
Age - 38 1998 the Bank Corporate Secretary and Assistant to the
President
Assistant Secretary and Assistant
To the President (1997-1998) of the Bank
</TABLE>
10
<PAGE>
Part II
ITEM 5-Market Information For the Registrant's Stock and Related
Stockholder Matters
The information required by Item 5 of Form 10-K appears on page 29 of the 1999
Annual Report and is incorporated herein by reference. As of December 31, 1999
there were 603 holders of record of the Parent Corporation's Common Stock.
ITEM 6-Selected Financial Data
The information required by Item 6 of Form 10-K appears on pages 1 and 13 of the
1999 Annual Report and is incorporated herein by reference.
ITEM 7-Management's Discussion And Analysis of Financial Condition and Results
of Operations
The information required by Item 7 of Form 10-K appears on pages 14 through 30
of the 1999 Annual Report and is incorporated herein by reference.
ITEM 7A-Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 7A of Form 10-K appears on pages 24 through 27
of the 1999 Annual Report and is incorporated herein by reference.
ITEM 8-Financial Statements and Supplementary Data
The information required by Item 8 of Form 10-K appears on pages 32 through 54
of the 1999 Annual Report and is incorporated herein by reference.
ITEM 9-Changes In and Disagreements With Accountants on
Accounting and Financial Disclosures
None
11
<PAGE>
Part III
ITEM 10-Directors of the Registrant
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy statement
for its 2000 Annual Meeting of Stockholders.
ITEM 11-Executive Compensation
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy statement
for its 2000 Annual Meeting of Stockholders.
ITEM 12-Security Ownership of Certain Beneficial Owners and Management
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy statement
for its 2000 Annual Meeting of Stockholders.
ITEM 13-Certain Relationships and Related Transactions
The Corporation responds to this item by incorporating herein by reference the
material responsive to such item in the Corporation's definitive proxy statement
for its 2000 Annual Meeting of Stockholders.
12
<PAGE>
Part IV
ITEM 14-Exhibits, Financial Statement Schedules, and
Reports on Form 8 -K
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Condition at December 31, 1999, and 1998 32
-------------------------------------------------------------------------------------------------------
Consolidated Statements of Income for the years ended
December 31, 1999 and 1998 and 1997 33
-------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 34
-------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 35
-------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 36-53
-------------------------------------------------------------------------------------------------------
Independent Auditors' Report 54
-------------------------------------------------------------------------------------------------------
</TABLE>
A2. Financial Statement Schedules
All Schedules have been omitted as inapplicable, or not required, or because the
required information is included in the Consolidated Financial Statements or the
notes thereto.
A3. Exhibits
3.1 Certificate of Incorporation of the Registrant is incorporated by
reference to exhibit 3.1 to the Registrant's Annual Report on Form 10K for
the year ended December 31, 1998.
3.2 By- Laws of the Registrant is incorporated by reference to exhibit 3.2 to
the Registrant's Annual Report on Form 10K for the year ended December 31,
1998.
10.1 Employment agreement between the Registrant and Donald Bennetti, dated
January 1, 1996, is incorporated by reference to exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
10.2 Employment agreement between the Registrant and John J. Davis is
incorporated by reference to exhibit 10.2 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995
10.3 The Registrant's Employee Stock Option Plan is incorporated by reference
to exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993
10.4 The Registrant's Outside Director Stock Option Plan is incorporated by
reference to exhibit 10.4 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993
10.5 Supplemental Executive Retirement Plans ("SERPS") are incorporated by
reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994
10.6 Executive Split Dollar Life Insurance Plan is incorporated by reference
to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994
10.7 Employment agreement between the Registrant and Anthony C. Weagley,
dated as of January 1, 1996 is incorporated by reference to exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995
10.10 Directors' Retirement Plan is incorporated by reference to exhibit
10.10 to the Registrant's Annual Report on Form 10K for the year ended
December 31, 1998.
13
<PAGE>
10.11 Center Bancorp, Inc. 1999 Stock Incentive Plan.
11.1 Statement regarding computation of per share earnings is omitted because
the computation can be clearly determined from the material incorporated by
reference in this Report.
13.1 Registrant's Annual Report to Shareholders for the year ended December
31, 1999 (parts not incorporated by reference are furnished for information
purposes only and are not to be deemed to be filed herewith.)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
B. Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Center Bancorp Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENTER BANCORP INC.
/s/ JOHN J. DAVIS
-------------------------------------
John J. Davis
President and Chief Executive Officer
Dated March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
the capacities described below and on the date indicated above:
/s/ CHARLES P. WOODWARD /s/ HUGO BARTH, III
- ------------------------------------ -------------------
Charles P. Woodward, Hugo Barth, III
Director and Chairman of the Board Director
/s/ ROBERT L. BISCHOFF /s/ ALEXANDER BOL
- ------------------------------------ -----------------
Robert L. Bischoff Alexander Bol
Director Director
/s/ BRENDA CURTIS /s/ DONALD G. KEIN
- ------------------------------------ ------------------
Brenda Curtis Donald G. Kein
Director Director
/s/ JOHN J. DAVIS /s/ HERBERT SCHILLER
- ------------------------------------ --------------------
John J. Davis Herbert Schiller
President and Chief Executive Officer Director
and Director
/s/ PAUL LOMAKIN, JR. /s/ STANLEY R. SOMMER
- ------------------------------------ ---------------------
Paul Lomakin, Jr. Stan R. Sommer
Director Director
/s/ WILLIAM THOMPSON /s/ ANTHONY C. WEAGLEY
- ------------------------------------ ----------------------
William Thompson Anthony C. Weagley
Director Vice President & Treasurer (Chief
Accounting and Financial Officer)
15
<PAGE>
CENTER BANCORP, INC.
1999 STOCK INCENTIVE PLAN
SECTION 1. General Purpose of Plan.
-----------------------
The name of this plan is the Center Bancorp, Inc. 1999 Stock Incentive
Plan (the "Plan"). The purpose of the Plan is to enable Center Bancorp, Inc.
(the "Company") and other members of the Group (as defined below) to retain and
attract executives and other key employees who contribute to the success of the
Company and the Group by their ability and industry, and to enable such
individuals to participate in the long-term success and growth of the Company by
giving them a proprietary interest in the Company.
SECTION 2. Definitions.
-----------
As used in this Plan the following terms have the meanings stated. The
singular includes the plural, and the masculine gender includes the feminine and
neuter genders, and vice versa, as the context requires. The word "person"
includes any natural person and any corporation, firm, partnership or other form
of association.
(a) "Award Date" means the date on which an Incentive is awarded as
specified by the Committee.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as it may be
amended from time to time.
(d) "Committee" means a committee of two or more members of the Board,
to which the Board has delegated the authority to administer the Plan under
Section 3.
(e) "Common Stock" means the common stock, no par value, of the
Company.
(f) "Company" means Center Bancorp, Inc. and any successor thereto.
(g) "Disability" means a permanent and total disability as defined in
Section 22 of the Code.
(h) "Fair Market Value" has the meaning stated in Section 8.12.
(i) "Group" means the Company, each parent corporation to the Company,
and each of the Company's subsidiaries, as these terms are defined in Sections
424(e) and 424(f) of the Code.
1
<PAGE>
(j) "Incentive Stock Option" means a stock option intended to qualify
as an incentive stock option under Section 422 of the Code.
(k) "Incentives" mean the economic incentives listed in Section 5.04
that may be awarded under this Plan.
(l) "Non-Employee Director" shall have the meaning set forth in Rule
16b-3(b)(3) as promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, or any successor definition adopted
by the Commission.
(m) "Non-Statutory Stock Option" means any Stock Option other than an
Incentive Stock Option.
(n) "Outside Director" means a director who (a) is not a current
employee of the Company or any member of an affiliated group which includes the
Company; (b) is not a former employee of the Company who receives compensation
for prior services (other than benefits under a tax-qualified retirement plan)
during the taxable year; (c) has not been an officer of the Company; (d) does
not receive remuneration from the Company, either directly or indirectly, in any
capacity other than as a director, except as otherwise permitted under Code
Section 162(m) and regulations thereunder. For this purpose remuneration
includes any payment in exchange for goods or services. This definition shall be
further governed by the provisions of Code Section 162(m) and regulations
promulgated thereunder.
(o) "Participant" means an employee or director of any member of the
Group to whom an Incentive has been awarded.
(p) "Plan" means this Center Bancorp, Inc. 1999 Stock Incentive Plan,
as the same may be amended from time to time.
(q) "Qualified Person" means a Participant's legal guardian or legal
representative or a deceased Participant's heir or legatee who has a legal right
to or in respect of an Incentive of that Participant.
(r) "Restricted Stock Award" means an award of Shares by the Company to
the Participant at a price that may be below Fair Market Value, or without
payment to the Company, but which are subject to restrictions on sale and other
transfer and are subject to forfeiture.
(s) "Share" means a share of Common Stock.
(t) "Stock Option" means an Incentive Stock Option or a Non-Statutory
Stock Option.
2
<PAGE>
SECTION 3. Administration.
--------------
3.01. The Committee. The Plan shall be administered by a Committee
consisting of not less than two persons appointed by the Board from among its
members. A person may serve on the Committee only if he or she is a Non-Employee
Director and an Outside Director. Committee members shall serve at the pleasure
of the Board.
The Committee shall have the power and authority to grant to eligible
employees, pursuant to the terms of the Plan, Stock Options and Restricted Stock
Awards.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the
Group to whom Stock Options and/or Restricted Stock
Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive
Stock Options, Non-Statutory Stock Options and
Restricted Stock Awards, or a combination of the
foregoing, are to be granted hereunder; and
(iii) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award
granted hereunder (including, but not limited to, any
restriction on any Stock Option or Restricted Stock
Award and/or the Shares relating thereto).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and
Participants.
SECTION 4. Eligibility.
-----------
4.01. Designation of Employees. All employees of any member of the
Group, including officers and directors who are employees, are eligible to
receive Incentives under the Plan. Directors and officers who are not employees
of any member of the Group may not receive Incentives under the Plan.
4.02. Participants. The Committee may consider any factor in selecting
Participants and in determining the type and amount of their Incentives,
including, but not limited to, (a) the current or anticipated financial
condition of the Group, (b) the contributions by the Participant to the Group
and (c) the other compensation provided to the Participant. The Committee's
award of an Incentive to a person in any year shall not require the Committee to
award any Incentive to that person in any other year.
3
<PAGE>
SECTION 5. Shares Subject to the Plan.
--------------------------
5.01. Number of Shares. Subject to Section 8.07, the aggregate number
of Shares which may be issued under the Plan shall not exceed 179,000 Shares.
5.02. Expiration and Cancellation. If an Incentive granted under the
Plan expires, is terminated or is otherwise canceled before exercise, that
Incentive and the related shares of Common Stock shall not apply toward the
limits provided in Section 5.01. If Shares issued or awarded under this Plan are
forfeited, canceled, terminated or reacquired by the Company, those forfeited,
canceled, terminated or reacquired Shares shall not apply toward the limits
provided in Section 5.01 and shall be available again for the grant of
Incentives.
5.03. Maintenance of Stock. Shares issued under the Plan shall be
authorized and unissued shares or shares of treasury stock. The Company shall
always maintain the number of such Shares at least equal to a number of Shares
for which Incentives have been granted and remain outstanding and unexercised.
5.04. Types of Incentive. Incentives may be granted in any one or any
combination of the following forms: (a) Non-Statutory Stock Options (Section 6);
(b) Incentive Stock Options (Section 6); and (c) Restricted Stock Awards
(Section 7).
SECTION 6. Stock Options.
-------------
Each Stock Option granted under this Plan shall be subject to the
following terms and conditions:
6.01. Price. The option price per share shall be determined by the
Committee; provided, however, that the option price shall not be less than the
Fair Market Value on the Award Date of the Common Stock subject to the Stock
Option.
6.02. Number. The number of Shares subject to the Stock Option shall be
determined by the Committee.
6.03. Duration and time for exercise. The Award Date of a Stock Option
shall be the date specified by the Committee, provided that such date shall not
be before the date on which the Stock Option is actually awarded. The term of
each Stock Option shall be determined by the Committee but shall not exceed ten
(10) years from the date of grant. Each Stock Option shall become exercisable at
such time or times and in such amount or amounts during its term as shall be
determined by the Committee at the time of grant. The Committee may accelerate
the exercisability of any Stock Option. Unless otherwise specified by the
Committee, once a Stock Option becomes exercisable, whether in full or in part,
it shall remain so exercisable until its expiration, forfeiture, termination or
cancellation.
4
<PAGE>
6.04. Exercise. A Stock Option may be exercised, in whole or in part,
by giving written notice to the Company (Attention: Chief Financial Officer) at
its principal office or to such transfer agent as the Company may designate. The
notice shall identify the Incentive being exercised and shall contain such other
information and terms as the Committee may require. The notice shall be
accompanied by full payment of the purchase price for the Shares (a) in United
States dollars in cash or by check, (b) at the discretion of the Committee, by
delivery of previously acquired Shares having a Fair Market Value equal on the
date of exercise to the cash exercise price of the Stock Option, or (c) at the
discretion of the Committee, by a combination of (a) and (b) above. As soon as
practicable after receipt of the written notice, the Company shall deliver to
the person exercising the Stock Option one or more certificates for the Shares.
6.05. Incentive Stock Options. Notwithstanding anything in this Plan to
the contrary, the following additional provisions shall apply to the grant of
Incentive Stock Options:
(a) The aggregate Fair Market Value on the Award Date of the Shares
with respect to which Incentive Stock Options are exercisable for the first time
by any Participant during any calendar year (under all plans of the Group) shall
not exceed $100,000;
(b) All Incentive Stock Options must be granted within ten (10) years
from the date on which the Plan was adopted by the Board;
(c) Unless exercised sooner, each Incentive Stock Option shall expire
no later than ten (10) years after the Award Date for that Incentive Stock
Option;
(d) No Incentive Stock Option shall be granted to any Participant who,
at the time that option is granted, owns (within the meaning of Section 422 of
the Code) stock having more than 10% of the total combined voting power of all
classes of stock of the Company or any member of the Group, unless the option
price is equal to at least 110% of the Fair Market Value of the Shares subject
to the option on the Award Date and the option is not exercisable later than
five years from the Award Date;
(e) Each Incentive Stock Option agreement referred to in Section 8.05
shall contain or be deemed to contain all provisions required in order to
qualify those Stock Options as incentive stock options under Section 422 of the
Code, and the provisions of this Plan shall be interpreted and construed to
effect such treatment under that Section.
5
<PAGE>
SECTION 7. Restricted Stock Awards.
-----------------------
Restricted Stock Awards shall be subject to the following terms and
conditions:
7.01. Number of Shares. The number of Shares to be issued by the
Company to a Participant under a Restricted Stock Award shall be determined by
the Committee.
7.02. Sale Price. The Committee shall determine the prices, if any, at
which Shares issued under a Restricted Stock Award shall be sold to a
Participant, which prices may vary from time to time and among Participants and
which may be below the Fair Market Value of Shares at the date of sale. The
Shares of restricted stock awarded at a price must be paid for (a) in United
States Dollars in cash or by check, (b) at the discretion of the Committee, by
delivery of Shares having a Fair Market Value equal on the purchase date to the
purchase price or (c) at the discretion of the Committee, by a combination of
(a) and (b) above.
7.03. Restrictions. All Shares issued under a Restricted Stock Award
shall be subject to such restrictions as the Committee may determine, which may
include, but not be limited to, any or all of the following:
(a) a prohibition against the sale, transfer, pledge, encumbrance or
other disposition of the Shares. Such a prohibition shall lapse at the time or
times that the Committee may determine (whether, for example, in annual or more
frequent installments, at the time of the death, disability or retirement of the
Participant, or otherwise); and
(b) a requirement that the Participant forfeit all or any part of those
Shares if the Participant's employment is terminated during any period in which
those Shares are subject to restrictions or if the Participant fails to satisfy
performance criteria approved by the Committee.
7.04. Certificates. Shares issued under a Restricted Stock Award shall
be registered in the name of the Participant and held in the custody of the
Company until the restrictions thereon lapse. Each certificate for those Shares
shall bear a legend in substantially the following form:
"The transfer of this certificate and the shares of Common
Stock represented by it is subject to the terms and conditions
(including conditions of forfeiture) contained in the Center
Bancorp, Inc. 1999 Stock Incentive Plan (the "Plan") and an
agreement entered into between the registered owner and Center
Bancorp, Inc. (the "Company"). Copies of the Plan and
agreement are on file in the office of the Secretary of the
Company."
7.05. End of Restrictions. After the restrictions have expired,
certificates evidencing the Shares shall be delivered to the Participant free of
the legend. The Shares, however, shall remain subject to any other restrictions
stated in this Plan or in the agreement providing for that Incentive.
6
<PAGE>
7.06. Stockholder Rights. Subject to the terms and conditions of the
Plan and any other restrictions determined by the Board and set forth in the
agreement for the Restricted Stock Award, each Participant who receives Shares
under a Restricted Stock Award shall have all of the rights of a stockholder
during any period in which the Shares are subject to restrictions, including,
but not limited to, the right to vote the Shares. Dividends on the Shares paid
in cash or property shall be paid to the Participant. Dividends payable in
Shares or other stock, however, shall be paid in restricted Shares subject to
all provisions of this Section 7.
SECTION 8. General.
-------
8.01. Effective date. This Plan shall be effective as of the date of
its approval by the shareholders of the Company. If shareholder approval is not
obtained within one year following the date the Plan is adopted by the Board,
the Plan and any Incentives awarded thereunder shall be void ab initio.
8.02. Duration. Unless the Plan is terminated earlier, the Plan shall
terminate ten (10) years from the date on which the Plan is approved by
shareholders of the Company. No Incentive or other rights under the Plan shall
be granted thereafter. The Board, without further approval of the Company's
stockholders, may at any time before that date terminate the Plan. After
termination of the Plan, no further Incentives may be granted under the Plan.
Stock Options granted before any such termination shall continue to be
exercisable in accordance with the terms of the Option. Restricted Stock Awards
granted before any such termination shall continue to vest in accordance with
the terms of the Award.
8.03. Non-transferability of Incentives; Exercise by Participant. No
Incentive may be sold, pledged, assigned, encumbered, disposed of or otherwise
transferred other than by will or the laws of descent and distribution. The
Company shall not be required to recognize any attempted disposition by any
Participant or Qualified Person. During a Participant's lifetime, such
Participant's Stock Options are only exercisable by such Participant.
8.04. Effects of Death, Disability, Termination of Employment.
Notwithstanding any provision to the contrary herein or in any Incentive
Agreement, the following provisions shall apply with respect to Stock Options
held by a Participant at the termination of such Participant's employment with
members of the Group in the event that such Participant's employment terminates
as a result of death or Disability:
(a) If such employment terminates as a result of death, the
Participant's estate shall have the right to exercise the
Participant's Stock Options for a period ending on the earlier
of the expiration dates of such Stock Options or one year from
the date of termination of employment, provided that such
Stock Options shall be exercisable by such estate only to the
extent exercisable on the date of termination of employment.
7
<PAGE>
(b) If such employment terminates as a result of Disability,
the Participant shall have the right to exercise his Stock
Options for a period ending on the earlier of the expiration
dates of such Stock Options or one year from the date that the
Participant is notified that he will no longer be employed by
any member of the Group (the "Notification Date"), provided
that such Stock Options shall be exercisable by the
Participant after termination of employment only to the extent
exercisable on the Notification Date.
(c) If such employment terminates for any reason other than
death or Disability, the Participant shall have the right to
exercise his Stock Options for a period ending on the earlier
of the expiration dates of such Stock Options or ninety days
from the date of termination of employment, provided that such
Stock Options shall be exercisable by the Participant after
termination of employment only to the extent exercisable on
the date of termination of employment.
8.05. Incentive Agreements. The terms of each Incentive shall be stated
in an agreement between the Company and the Participant in a form approved by
the Committee. The Participant must execute and deliver the agreement to the
Company as a condition to the effectiveness of the Incentive. All such
agreements may contain all terms and conditions as the Committee considers
advisable that are not inconsistent with the Plan, including, but not limited
to, transfer restrictions, rights of first refusal, forfeiture provisions,
representations and warranties of the Participant and provisions to ensure
compliance with all applicable laws, regulations and rules as provided in
Section 8.06.
8.06. Compliance with Law. The Company may determine, in its sole
discretion, that it is necessary or desirable to list, register or qualify (or
to update any listing, registration or qualification of) any Incentive or the
Shares issuable or issued under any Incentive or this Plan on any securities
exchange or under any federal or state securities law, or to obtain consent or
approval of any governmental body as a condition of, or in connection with, the
award of any Incentive, the issuance of Shares under any Incentive or this Plan,
or the removal of any restrictions imposed on such Shares. If the Company makes
such a determination, the Incentive shall not be awarded or the Shares shall not
be issued or the restrictions shall not be removed, as applicable, in whole or
in part, unless and until the listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company. The Company's obligation to sell or issue Shares
under an Incentive is subject to compliance with all applicable laws and
regulations. The Committee, in its sole discretion, shall determine whether the
sale and issue of Shares is in compliance with all applicable laws and
regulations.
8.07. Adjustment. If the outstanding Shares of Common Stock are
increased or decreased or changed into or exchanged for a different number or
kind of securities of the Company or of another corporation, by reason of
reorganization, merger, consolidation, recapitalization, reclassification, stock
split, combination of securities or dividend payable in corporate securities,
then an appropriate adjustment shall be made by the Board in the number, kind
and/or price of Shares for which Incentives may be granted under the Plan. In
addition, the Board shall make appropriate adjustment in the number, kind and/or
price of Shares as to which outstanding Incentives, or portions thereof then
unexercised, shall be exercisable. In the event of any such adjustment, the
exercise price of any Stock Option, the performance objectives, restrictions or
other terms and conditions of any Incentive and the Shares issuable under any
Incentive shall be adjusted as and to the extent appropriate, in the sole and
absolute discretion of the Board, to provide each Participant with substantially
the same relative rights before and after such adjustment to the extent
practical.
8
<PAGE>
8.08. Withholding.
(a) The Company shall have the right to withhold from any payments made
under the Plan or to collect as a condition to any award, payment or issuance of
Shares under the Plan any taxes required to be withheld by Federal, state or
local law. Whenever a Participant is required to pay to the Company an amount
required to be withheld under applicable tax laws in connection with a
distribution of Shares or upon exercise of a Stock Option, the Participant may
satisfy this obligation in whole or in part by electing (the "Election") to have
the Company withhold from the distribution that number of Shares having a value
equal to the amount required to be withheld. The value of the Shares to be
withheld shall be based on the Fair Market Value of the Shares on the date on
which the amount of tax to be withheld is determined ("Tax Date").
(b) Each Election must be made before the Tax Date. The Committee may
disapprove any Election, may suspend or terminate the right to make Elections,
or may provide with respect to any Incentive that the right to make an Election
shall not apply to that Incentive. An Election is irrevocable.
8.09. No Right to Continued Employment. No Participant under the Plan
shall have any right to continue in the employ of the Company or any member of
the Group for any period of time because of his or her participation in the
Plan.
8.10. No Right as Stockholder. No Participant or Qualified Person shall
have the rights of a stockholder with respect to the Shares covered by an
Incentive unless a stock certificate is issued to that person for the Shares. No
adjustment shall be made for cash dividends or similar rights for which the
record date is before the date on which such stock certificate is issued.
8.11. Amendment of the Plan. The Board may amend the Plan from time to
time in such respects as the Board deems advisable. No such amendment, however,
shall (a) change or impair an Incentive without the consent of the Participant
or Qualified Person holding that Incentive, or (b) without the prior approval of
the Company stockholders (i) increase the limits provided in Section 5.01
(except by adjustment under Section 8.07), (ii) change the class of persons
eligible to receive Incentives under the Plan, or (iii) make any other change
that requires approval of the Company stockholders under applicable law or to
preserve the treatment of the Incentive Stock Options as such under Section 422
of the Code.
8.12. Definition of Fair Market Value. Whenever "Fair Market Value" of
Common Stock is to be determined for purposes of this Plan, it shall be
determined as follows:
9
<PAGE>
(a) If the Common Stock is publicly traded at the time Fair
Market Value is to be determined under the Plan, "Fair Market Value" shall mean
the average of the highest and lowest sales prices on the date of determination
on the over-the-counter market as reported by NASDAQ or, if the Common Stock is
then traded on a national securities exchange, the average of the highest and
lowest sales prices on that date on the principal national securities exchange
on which it is so traded; or
(b) If the Common Stock is not publicly traded at the time
Fair Market Value is to be determined under the Plan, "Fair Market Value" shall
be determined in good faith from time to time by the Committee.
8.13. Acceleration; Exercise. Notwithstanding anything to the contrary
set forth in the Plan, in the event that (x) the Company should adopt a plan of
reorganization pursuant to which (i) it shall merge into, consolidate with, or
sell substantially all of its assets to, any other corporation or entity or (ii)
any other corporation or entity shall merge into the Company in a transaction in
which the Company shall become a wholly-owned subsidiary of another entity, or
(y) the Company should adopt a plan of complete liquidation, then (I) all Stock
Options granted hereunder shall be fully exercisable upon consummation of such
event and (II) the Company may give a Participant written notice thereof
requiring such Participant either (a) to exercise his or her Stock Options
within thirty days after receipt of such notice, including all installments
whether or not they would otherwise be exercisable at that date, (b) in the
event of a merger or consolidation in which shareholders of the Company will
receive shares of another corporation, to agree to convert his or her Stock
Options into comparable options to acquire such shares, (c) in the event of a
merger or consolidation in which shareholders of the Company will receive cash
or other property (other than capital stock), to agree to convert his or her
Stock Options into such consideration (in an amount representing the
appreciation over the exercise price of such Stock Options) or (d) to surrender
such Stock Options or any unexercised portion thereof.
8.14 Investment Letter. If required by the Committee, each Participant
shall agree to execute a statement directed to the Company, upon each and every
exercise by such Participant of any Stock Options, that shares issued thereby
are being acquired for investment purposes only and not with a view to the
distribution thereof, and containing an agreement that such shares will not be
sold or transferred unless either (1) registered under the Securities Act of
1933 and all applicable state securities laws, or (2) exempt from such
registration in the opinion of Company counsel. If required by the Committee,
certificates representing shares of Common Stock issued upon exercise of Stock
Options shall bear a restrictive legend summarizing the restrictions on
transferability applicable thereto.
8.15. Fractional and Minimum Shares. In no event shall a fraction of a
Share be purchased or issued under the Plan without Board approval. The
Committee may specify a minimum number of Shares for which each Stock Option
must be exercised.
10
<PAGE>
8.16. Application of Funds. The proceeds received by the Company from
the sale of Shares under the Plan shall be used for general corporate purposes.
8.17. Other Incentives and Plans. Nothing in this Plan shall prohibit
any member of the Group from establishing other employee incentives and plans.
8.18. Governing Law. The validity and construction of the Plan and of
each agreement evidencing Incentives shall be governed by the laws of the State
of New Jersey, excluding the conflict-of-laws principles thereof.
11
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------- Percent
(Dollars in thousands, except per share data) 1999 1998 change
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Earnings
Net Interest Income $ 19,291 $ 17,113 12.73%
Provision for Loan Losses 108 120 -10.00
Other Income 1,089 971 12.15
Other Expenses 13,290 11,651 14.07
Net Income 4,629 4,172 10.95
Cash Dividends Declared $ 2,213 $ 2,023 9.39
- -------------------------------------------------------------------------------------------------------------------
Per Share Data
Net Income
Basic $ 1.23 $ 1.12 9.82%
Diluted 1.22 1.10 10.91
Cash Dividends 0.58 0.52 11.54
Book Value 9.62 9.75 -1.33
Tangible Book Value $ 8.90 $ 8.94 -0.45
- -------------------------------------------------------------------------------------------------------------------
At Year End Bid Ask Bid Ask
Market Value Per Common Share $15.00 $15.63 $15.95 $16.55
- -------------------------------------------------------------------------------------------------------------------
At Year End
Investment Securities $ 303,940 $ 287,966 5.55%
Loans 169,089 150,099 12.65
Assets 509,624 470,134 8.40
Deposits 389,255 377,167 3.20
FHLB Advances 50,000 40,000 25.00
Federal Funds Purchased and Securities
Sold Under Agreement to Repurchase 30,752 12,602 144.02
Stockholders Equity $ 36,513 $ 36,631 -0.32
Shares Outstanding 3,794,477 3,757,056 1.00
Financial Ratios
Return on Average Assets 0.92% 0.88%
- -------------------------------------------------------------------------------------------------------------------
Return on Average Stockholders Equity 12.44% 11.75%
Return on Tangible Average Stockholders Equity 13.50% 12.93%
- -------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared as a Percent of
Net Income 47.81% 48.47%
- -------------------------------------------------------------------------------------------------------------------
Average Stockholders Equity as a
Percent of Average Total Assets 7.43% 7.49%
Tangible Average Stockholders Equity as a
Percent of Average Total Assets 6.92% 6.81%
- -------------------------------------------------------------------------------------------------------------------
Stockholders Equity as a Percent of Total Assets 7.16% 7.79%
Tangible Stockholders Equity as a
Percent of Average Total Assets 6.66% 7.09%
- -------------------------------------------------------------------------------------------------------------------
Average Risk-Based Tier I Capital Ratio 15.44% 15.03%
Average Risk-Based Tier I and Tier II Capital 16.06% 15.64%
Tier I Leverage Ratio 6.93% 6.93%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
All share and per share amounts have been restated to reflect the 5% stock
dividend distributed on June 1, 1999 to stockholders of record May 18, 1999 and
the 3-for-2 stock split distributed May of 1998.
12
<PAGE>
LOGO Center Bancorp, Inc.
Summary of Selected Statistical Information and Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Income
Interest income $ 32,092 $ 30,686 $ 30,706 $ 26,430 $ 21,749
Interest expense 12,801 13,573 14,487 11,586 8,787
Net interest income 19,291 17,113 16,219 14,844 12,962
Provision (credit) for loan losses 108 120 0 (132) 0
Net interest income after provision
(credit) for loan losses 19,183 16,993 16,219 14,976 12,962
Other income 1,089 971 1,111 727 732
Other expense 13,290 11,651 10,596 9,910 8,138
Income before income tax expense 6,982 6,313 6,734 5,793 5,556
Income tax expense 2,353 2,141 2,223 1,636 1,516
Net income $ 4,629 $ 4,172 $ 4,511 $ 4,157 $ 4,040
- ----------------------------------------------------------------------------------------------------------------------
Statement of Financial Condition Data
Investments $ 303,940 $ 287,966 $ 298,298 $ 280,123 $ 209,692
Total loans 169,089 150,099 132,424 117,830 97,570
Total assets 509,624 470,134 473,112 459,218 347,777
Deposits 389,255 377,167 436,010 426,654 295,666
Stockholders' equity $ 36,513 $ 36,631 $ 33,422 $ 30,213 $ 27,679
- ----------------------------------------------------------------------------------------------------------------------
Dividends
Cash dividends $ 2,213 $ 2,023 $ 1,863 $ 1,787 $ 1,775
Dividend payout ratio 47.8% 48.5% 41.3% 43.0% 43.9%
- ----------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share
Cash dividends $ 0.58 $ 0.52 $ 0.50 $ 0.48 $ 0.48
- ----------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic $ 1.23 $ 1.12 $ 1.22 $ 1.13 $ 1.10
Diluted $ 1.22 $ 1.10 $ 1.21 $ 1.13 $ 1.10
- ----------------------------------------------------------------------------------------------------------------------
Weighted Average Common Shares
Outstanding
Basic 3,775,846 3,741,478 3,710,804 3,689,444 3,668,564
Diluted 3,799,680 3,777,390 3,738,236 3,698,708 3,668,564
- ----------------------------------------------------------------------------------------------------------------------
Operating Ratios
Return on average assets 0.92% 0.88% 0.94% 1.00% 1.15%
Return on tangible average equity 13.50% 12.93% 15.92% 15.21% 15.32%
- ----------------------------------------------------------------------------------------------------------------------
Book Value
Book value per common share $ 9.62 $ 9.75 $ 8.99 $ 8.17 $ 7.52
Tangible book value per common share $ 8.90 $ 8.94 $ 8.08 $ 7.17 $ 7.52
- ----------------------------------------------------------------------------------------------------------------------
Non-Financial Information
Common stockholders 603 606 609 633 629
Staff--Full time equivalent 162 153 140 151 132
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnote: All share and per share amounts have been restated to reflect the 5
percent stock dividend distributed June 1, 1999 to stockholders of record May
18, 1999 and the 3-for-2 stock split distributed in May of 1998, and all prior
stock dividends and splits.
13
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
The following introduction to Management's Discussion and Analysis
highlights the principal activities of Center Bancorp, Inc. that have
contributed to its earnings performance in 1999.
Center Bancorp's performance for 1999 was highlighted by loan growth, in
the commercial, mortgage and consumer loan portfolios, with consistent asset
quality. Commensurate with the growth in the loan portfolio, the Corporation
recorded a $108,000 provision for loan losses during 1999. As a result of
consistent earnings and capital growth, dividends were increased on September
2, 1999 to $.15 per share from the then current rate of $.143 per share or an
increase of 5 percent. Furthermore, the Board of Directors declared a five
percent stock dividend. The dividend was distributed in June of 1999, and
represented the fourth consecutive year that Center Bancorp, Inc. has either
paid a stock dividend or declared a stock split. 1999 represented another year
of solid earnings.
Net income for the year ended December 31, 1999, amounted to $4,629,000 as
compared to $4,172,000 and $4,511,000 earned in 1998 and 1997, respectively.
Basic earnings per share for 1999 amounted to $1.23 as compared to $1.12 and
$1.22 earned in 1998 and 1997, respectively. Diluted earnings per share were
$1.22 for 1999 compared to $1.10 in 1998 and $1.21 in 1997. These figures have
been restated to reflect the 5% Stock Dividend distributed June 1, 1999, the
three-for-two stock split distributed in 1998 and the 5% stock dividend
distributed in 1997.
Earnings performance for 1999 reflected increased net interest income,
offset in part by an increase in operating expenses. These expenses were a
direct result of the growth and expansion of Union Center National Bank (the
"Bank"). Net interest income increased primarily as a result of a change in the
asset mix and more importantly, a positive change in the funding mix coupled
with lower rates paid on deposits and borrowings.
The Corporation's total assets at December 31, 1999 amounted to $509.6
million, increasing $39.5 million or 8.4 percent from December 1998 levels. The
return on average assets was 0.92 percent in 1999, as compared with 0.88
percent and 0.94 percent in 1998 and 1997, respectively.
A continuing key element of the Corporation's consistent performance is
its strong capital base. The Corporation's risk-based capital ratios at
December 31, 1999 were 15.4 percent for Tier I capital and 16.1 percent for
total risk-based capital. These ratios substantially exceed the minimum of 4
percent for Tier I capital and 8 percent for total capital under regulatory
guidelines. From a performance viewpoint, return on tangible average
shareholders' equity was 13.5 percent in 1999, compared with 12.9 percent for
1998 and 15.9 percent in 1997.
The following sections discuss the Corporation's Results of Operations,
Asset and Liability Management, Liquidity and Capital Resources.
RESULTS OF OPERATIONS
The most significant component of Center Bancorp's earnings is net
interest income, which is the difference between the interest earned on the
portfolio of earning assets (principally investments and loans) and the
interest paid for deposits and short-term borrowings which support these
assets.
Net interest income is directly affected by changes in the volume and mix
of interest-earning assets and interest-bearing liabilities which support those
assets, as well as changes in the rates earned and paid. Net interest income is
presented in this financial review on a fully tax-equivalent basis, whereby
14
<PAGE>
tax-exempt income (primarily interest earned on various obligations of state
and political subdivisions) is adjusted by the amount of income tax which would
have been paid had the assets been invested in taxable issues. As a result, the
net interest income data presented in this financial review differ from the
Corporation's net interest income components of the consolidated financial
statements presented elsewhere in this report.
The following table presents the components of net interest income (on a
tax-equivalent basis) for the past three years.
<TABLE>
<CAPTION>
1999
- ----------------------------------------------------------------------------------
Increase
(Decrease)
From Percent
(dollars in thousands) Amount Prior Year Change Amount
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Investments $19,442 $ 230 1.2 $19,212
Loans, including fees 12,198 1,274 11.7 10,924
Federal funds sold and securities
purchased under agreement to
resell 452 (98) (17.8) 550
- ----------------------------------------------------------------------------------
Total interest income 32,092 1,406 4.6 30,686
- ----------------------------------------------------------------------------------
Interest expense:
Certificates $100,000 or more 2,703 (1,598) (37.2) 4,301
Deposits 7,310 (540) ( 6.9) 7,850
Borrowings 2,788 1,366 96.1 1,422
- ----------------------------------------------------------------------------------
Total interest expense 12,801 (772) ( 5.7) 13,573
- ----------------------------------------------------------------------------------
Net interest income * 19,291 2,178 12.7 17,113
Tax-equivalent adjustment 441 80 22.2 361
- ----------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis $19,732 $ 2,258 12.9 $17,474
==================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
From Percent From Percent
(dollars in thousands) Prior Year Change Amount Prior Year Change
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Investments $ (966) ( 4.8) $20,178 $ 2,854 16.4
Loans, including fees 944 9.5 9,980 1,355 15.7
Federal funds sold and securities
purchased under agreement to
resell 2 0.4 548 67 13.9
- -------------------------------------------------------------------------------------------------
Total interest income (20) ( 0.1) 30,706 4,276 16.2
- -------------------------------------------------------------------------------------------------
Interest expense:
Certificates $100,000 or more (1,535) (26.3) 5,836 1,723 41.9
Deposits (184) ( 2.3) 8,034 937 13.2
Borrowings 805 130.5 617 241 64.1
- -------------------------------------------------------------------------------------------------
Total interest expense (914) ( 6.3) 14,487 2,901 25.0
- -------------------------------------------------------------------------------------------------
Net interest income * 894 5.5 16,219 1,375 9.3
Tax-equivalent adjustment (120) (25.0) 481 (97) (16.8)
- -------------------------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis $ 774 4.6 $16,700 $ 1,278 8.3
- -------------------------------------------------------------------------------------------------
</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
earned on securities of state and political subdivisions.
NET INTEREST INCOME
Net interest income on a fully tax-equivalent basis increased $2,258,000
or 12.9 percent to approximately $19.7 million during 1999 from approximately
$17.5 million for 1998. The net interest margin increased from 3.92 percent to
4.20 percent for 1999. The change was due to an increased volume of
interest-earning assets and a lower cost of funds, reflecting the decrease in
short-term interest rates that prevailed throughout most of 1999. Average
interest-earning assets for 1999 amounted to $469.7 million compared to $445.3
million for 1998. Average interest-bearing liabilities increased $13.9 million
during 1999 to $375.8 million from $361.9 million in 1998. Net average
interest-earning assets increased from $83.4 million in 1998 to $93.9 in 1999.
The 1999 change in average balances was primarily due to increased volumes of
interest-bearing assets, primarily loans.
The average yield on interest-earning assets decreased from 6.97 percent
in 1998 to 6.93 percent in 1999 while there was a greater decrease in the
average cost of interest-bearing liabilities (3.75 percent in 1998 versus 3.41
percent in 1999), reflecting a decrease in short-term interest rates that
prevailed through most of 1999.
The factors underlying the year-to-year changes in net interest income are
reflected in the tables appearing below and on page 16, both of which have been
presented on a tax-equivalent basis (assuming a 34 percent tax rate). The table
on page 31 (Average Statements of Condition with Interest and Average Rates)
shows the Corporation's consolidated average balance of assets, liabilities and
15
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
stockholders' equity, the amount of income produced from interest-earning
assets and the amount of expense resulting from interest-bearing liabilities,
and net interest income as a percentage of average interest-earning assets. The
table presented below (Analysis of Variance in Net Interest Income Due to
Volume and Rates) quantifies the impact on net interest income resulting from
changes in average balances and average rates over the past three years. Any
change in interest income or expense attributable to both changes in volume and
changes in rate has been allocated in proportion to the relationship of the
absolute dollar amount of change in each category.
ANALYSIS OF VARIANCE IN NET INTEREST INCOME DUE TO VOLUME AND RATES
<TABLE>
<CAPTION>
1999/1998 1998/1997
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
(dollars in thousands) Volume Rate Change Volume Rate Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities:
Taxable $ 18 $ 55 $ 73 $ (573) $(126) $ (699)
Non-Taxable 282 (45) 237 (345) (42) (387)
Federal funds sold and securities
purchased under agreement to resell (62) (36) (98) 7 (5) 2
Loans, net of unearned discounts 1,626 (352) 1,274 1,062 (118) 944
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,864 (378) 1,486 151 (291) (140)
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposits 298 74 372 97 117 214
Savings deposits (20) (197) (217) (124) (171) (295)
Time deposits (1,463) (803) (2,266) (1,306) (259) (1,565)
Other interest-bearing deposits 56 (83) (27) (47) (26) (73)
Borrowings 1,426 (60) 1,366 938 (133) 805
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 297 (1,069) (772) (442) (472) (914)
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,567 $ 691 $ 2,258 $ 593 $ 181 $ 774
===========================================================================================================================
</TABLE>
Interest income (tax-equivalent) increased by $1,486,000 from 1998 to 1999
and decreased by $140,000 from 1997 to 1998. The primary factor in the increase
in interest income during 1999 was the increase in the volume of
interest-earning assets offset in part by lower average rates earned on
interest-earning assets. The Corporation's loan portfolio increased on average
by $21.2 million, primarily as a result of increased volumes of commercial real
estate, commercial and home equity loans. This increase was primarily achieved
through increased business development and access to new markets. The loan
portfolio (traditionally the highest yielding type of interest-earning asset)
represented 34.1 percent of the Corporation's interest-earning assets (on
average) during 1999 as compared with 31.2 percent of such assets (on average)
during 1998. The increased level of interest income generated from the loan
portfolio in 1999 was due to increased volume, as the average yield on the
Corporation's loans declined by 25 basis points.
Investments represented a modest change in the earning-asset mix in 1999.
The investment portfolio increased on average by $4.4 million.
16
<PAGE>
Within the investment portfolio, the average volume in 1999 increased in
taxable securities by $270,000 and in the non-taxable portfolio by $4.1 million
compared to 1998. The average yield on the investment portfolio was 6.61
percent in 1999 and 1998.
Interest expense decreased during 1999, primarily as a result of a
reduction in average rates paid, bolstered by an increase in lower costing
short-term borrowings. For the year ended December 31, 1999, interest expense
decreased by $772,000 or 5.7 percent as compared with the year ended December
31, 1998.
The average cost of funds decreased by 34 basis points, reflecting the
decline in interest rates, and changes in the liability mix, (i.e., decreased
volumes of more costly interest-bearing time deposits and increased volumes of
less costly short-term borrowings).
During 1998 interest expense decreased $914,000, or 6.3 percent as
compared with 1997. This was primarily a result of decreased deposit volumes,
and an increase in lower costing short-term borrowings coupled with lower rates
that prevailed. The resulting average cost of funds to the Corporation
decreased by 15 basis points.
For the three-year period ended December 31, 1999, the Corporation's net
interest margin on a tax-equivalent basis (i.e., net interest income on a
tax-equivalent basis as a percent of average interest-earning assets) amounted
to 4.20 percent in 1999, 3.92 percent in 1998, and 3.75 percent in 1997. The
increases noted 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 interest-earning assets, primarily the increased loan
volumes. This was sustained by the effects of the change in the mix of
interest-bearing liabilities to less costly funding. The rates paid on
interest-bearing liabilities averaged 3.41 percent in 1999 compared to 3.75
percent in 1998 and 3.90 percent for 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) decreased approximately 2 basis points during 1999
from 70 basis points in 1998. During the comparable periods of 1998 and 1997
there was an increase of 6 basis points, from 64 basis points to 70 basis
points. This change reflects the ongoing shift in consumer trends and
preferences for interest-bearing deposit accounts versus more traditional
non-interest deposit accounts.
The Corporation's net interest rate spread (i.e., the average yield on
average interest-earning assets, calculated on a tax-equivalent basis, minus
the average rate paid on interest-bearing liabilities) rose to 3.52 percent in
1999 from 3.22 percent in 1998 and was 41 basis points higher than the 3.11
percent in 1997. The increase in net interest spread during 1999 was primarily
a result of the decreased cost of interest-bearing liabilities, offset in part
by a decline in rates earned on interest-bearing assets.
INVESTMENTS
The average volume of investment securities increased by $4.4 million in
1999 as compared to 1998. The tax-equivalent yield on investments remained
unchanged at 6.61 percent in 1999 and 1998. The stability in the yield on the
investment portfolio in 1999 was achieved through equal or higher market rates
on purchases made to replace similar yielding investments which had matured,
were prepaid or were called.
The impact of repricing activity on yields was lessened by a change in the
mix of the portfolio and lengthening of investment maturities, resulting in
stable spreads. 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.
17
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
At December 31, 1999, the total investment portfolio excluding overnight
investments, was $303.9 million, or 64.3 percent of earning-assets, as compared
to $288.0 million or 65.7 percent at December 31, 1998. The principal
components of the investment portfolio are U.S. Government Treasury and Federal
Agency securities. For additional information regarding the Corporation's
investment portfolio, see Note 4 to the Consolidated Financial Statements.
LOANS
Loan growth during 1999 occurred in all principal categories of the loan
portfolio. This growth resulted from the Corporation's aggressive marketing and
business development programs coupled with new opportunities brought about from
expansion of our branch network into new key markets. The decline of yield in
the loan portfolio, however, was the result of a lower prime rate environment
during the fourth quarter of 1998 and first half of 1999, coupled with a
continued competitive rate structure, to attract new loans, in light of growing
market competition. To a lesser degree, the affects on additions to the loan
portfolio were lessened by continued re-financing activity and by the
heightened competition for borrowers that exists in the Corporation's lending
markets. The Corporation's desire to continue growing this component of the
earning-asset mix is reflected in its current business development plan and
marketing plans, as well as its corporate strategic plan.
Analyzing the portfolio for the year ended December 31, 1999, average loan
volume increased $21.2 million, while the portfolio's average yield decreased
25 basis points as compared with 1998. Total average loan volume increased to
$160.2 million with an average yield of 7.61 percent, as compared to $139.0
million with an average yield of 7.86 percent for the year ended December 31,
1998. For additional information regarding loans, see Note 5 to the
Consolidated Financial Statements.
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
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 year-end 1999, the
level of the allowance was $1,423,000 as compared to a level of $1,326,000 at
December 31, 1998. The Corporation had a provision to the allowance for loan
losses of $108,000 in 1999, $120,000 in 1998 and none in 1997.
At December 31, 1999, the allowance for loan losses amounted to $1,423,000
or 0.84 percent of total loans. In management's view, the level of the
allowance at December 31, 1999 is adequate to cover losses inherent in the loan
portfolio.
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
18
<PAGE>
the allowance based on their analysis of information available to them at the
time of their examination. The allowance for loan losses as a percentage of
total loans amounted to 0.84 percent, 0.88 percent and 0.96 percent at December
31, 1999, 1998 and 1997, respectively.
During 1999 the Corporation did not experience any substantial problems
within its loan portfolio. Net charge-offs were $11,000 in 1999, $63,000 in
1998 and $24,000 in 1997. The Corporation had non-accrual loans amounting to
$292,000 at December 31, 1999, $41,000 at December 31, 1998, and $27,000 at
December 31, 1997. The increase in 1999 was attributable to a residential
mortgage loan in the amount of $157,000 and two home equity loans aggregating
$112,000. The residential mortgage loan has subsequently become current, while
the home equity loans are well secured and in the process of collection. The
Corporation continues to aggressively pursue collections of principal and
interest on loans previously charged-off.
The value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or at the fair value
of the collateral if the loan is collateral dependent. Impaired loans consist
of non-accrual loans and loans internally classified as substandard or below,
in each instance above an established dollar threshold of $200,000. All loans
below the established dollar threshold are considered homogenous and are
collectively evaluated for impairment. At December 31, 1999, total impaired
loans were approximately $519,000, the Corporation did not have any impaired
loans at December 31, 1998 or 1997. Although classified as substandard, the
impaired loans were current with respect to principal and interest payments.
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 could 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.
19
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
FIVE YEAR STATISTICAL ALLOWANCE FOR LOAN LOSSES
The following table reflects the relationship of loan volume, the
provision and allowance for loan losses and net charge-offs for the past five
years.
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 160,208 $ 138,967 $ 125,476 $107,897 $ 95,216
========================================================================================================================
Total loans at end of period $ 169,089 $ 150,099 $ 132,424 $117,830 $ 97,570
========================================================================================================================
Analysis of the Allowance for Loan Losses
Balance at the beginning of year $ 1,326 $ 1,269 $ 1,293 $ 1,073 $ 1,073
Charge-offs:
Commercial 0 0 2 0 0
Real estate mortgage 0 0 0 470 0
Installment loans 23 70 29 9 10
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 23 70 31 479 10
- ------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 0 0 0 0 0
Real estate mortgage 0 0 0 132 5
Installment loans 12 7 7 6 5
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 12 7 7 138 10
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs: 11 63 24 341 0
========================================================================================================================
Adjustments from acquisition of Lehigh 0 0 0 693 0
========================================================================================================================
Provision (credit) for loan losses 108 120 0 (132) 0
========================================================================================================================
Balance at end of year $ 1,423 $ 1,326 $ 1,269 $ 1,293 $ 1,073
========================================================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the
year 0.01% 0.05% 0.02% 0.32% 0.00%
========================================================================================================================
Allowance for Loan Losses as a percentage
of total loans at end of year 0.84% 0.88% 0.96% 1.10% 1.10%
========================================================================================================================
</TABLE>
The 1996 charge-off of $470,000 in real-estate mortgage loans occurred on
loans acquired from Lehigh, which were subsequently sold. Similarly, the
$132,000 loan loss recovery, in 1996, was on a loan that had been previously
part of Lehigh's portfolio.
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.
20
<PAGE>
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.
The following table sets forth, as of the dates indicated, the amount of
the Corporation's non-accrual loans, restructured loans, accruing loans past
due 90 days or more and other real estate owned.
<TABLE>
<CAPTION>
At December 31,
- ----------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $292 $ 41 $ 27 $298 $ 0
Restructured loans 0 0 0 0 0
Accruing loans past due 90 days or more 0 24 73 121 48
Other real estate owned 73 73 0 0 0
- ----------------------------------------------------------------------------------------
Total non-performing assets $365 $138 $100 $419 $ 48
========================================================================================
</TABLE>
Non-accrual loans at December 31, 1999 increased $251,000 over the amount
reported at December 31, 1998. The increase in non-accrual loans was
attributable to a residential mortgage loan in the amount of $157,000 and two
home equity loans aggregating to $112,000. The mortgage loan has been brought
current by the borrower, while the home equity loans are well secured and in
the process of collection.
At December 31, 1999 other than the loans set forth above, the Corporation
is not aware of any loans which present serious doubts as to the ability of its
borrowers to comply with present loan repayment terms and which are expected to
fall into one of the categories set forth in the table above. Other real estate
owned (OREO) at December 31, 1999 and 1998, consisted of a closed branch
facility with a carrying value of approximately $73,000.
NON-INTEREST INCOME
The following table presents the principal categories of non-interest
income for each of the years in the three year period ended December 31, 1999.
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 % change 1998 1997 % change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Other income:
Service charges, commissions and fees $ 863 $748 1.54 $748 $ 638 17.2
Other income 228 223 2.2 223 139 60.4
(Loss) gain on securities sold (2) 0 (100.0) 0 334 (100.0)
- ---------------------------------------------------------------------------------------------------------------
Total other non-interest income $1,089 $971 12.2 $971 $1,111 (12.6)
===============================================================================================================
</TABLE>
Total other (non-interest) income, exclusive of (losses)/gains on
securities sold, reflects an increase of $120,000 or 12.4 percent in 1999. The
primary component of the increase was the rise of fee revenue reflected in
service charges, commissions and fees. This increase of $115,000 or 15.4 percent
in such fees, was a result of increased fee income derived from ATM fees and
deposit account activity. For the 1998 period, total other(non-interest) income,
exclusive of gains on securities sold, reflects an increase of $194,000 or 25.0
percent. The primary components of the increase were increased ATM fees and
increased fee income derived from checking account activity.
21
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
During 1999 the Corporation sold approximately $3.0 million in securities
from its available-for-sale portfolio with a net loss of approximately $2,400.
During 1998 the Corporation did not sell any securities from its
available-for-sale portfolio. However, during 1997 there were sales from the
Corporation's available-for-sale portfolio of approximately $26.2 million, with
a net gain of approximately $334,000. These sales were made as part of the
Corporation's investment strategy.
NON-INTEREST EXPENSE
The following table presents the principal categories of non-interest
expense for each of the years in the three-year period ended December 31, 1999.
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 % change 1998 1997 % change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Other non-interest expense:
Salaries and employee benefits $ 6,772 $ 6,005 12.8 $ 6,005 $ 5,487 9.4
Occupancy, net 1,251 1,063 17.7 1,063 1,015 4.7
Premises and equipment 1,348 1,297 3.9 1,297 1,341 (3.3)
Stationery and printing 471 438 7.5 438 254 72.4
Marketing and advertising 504 446 13.0 446 337 32.3
Other 2,944 2,402 22.6 2,402 2,162 11.1
- --------------------------------------------------------------------------------------------------------------
Total other non-interest expense $13,290 $11,651 14.1 $11,651 $10,596 10.0
==============================================================================================================
</TABLE>
Total other non-interest expense increased $1,639,000 or 14.1 percent in
1999 as compared to an increase of $1,055,000 or 10.0 percent from 1997 to
1998. The level of operating expenses during 1999 was unfavorably impacted by
the overall increase in non-interest expense. While management continues to
emphasize expense control, the year to year increases in expense are
attributable to the continued expansion of the Bank's facilities, continued
investments in technology and the need to attract, develop and retain
high-caliber employees. Salaries and employee benefits accounted for 50.9
percent of total other non-interest expense for 1999, as compared to 51.5
percent and 51.8 percent for the years 1998 and 1997, respectively. The
Corporation's efficiency ratio (other expenses less non-recurring expenses as a
percentage of net interest income on a tax-equivalent basis and other income
exclusive of net securities gains/(losses)) was 60.2 percent, 61.8 percent and
56.8 percent respectively, for 1999, 1998 and 1997. The ratio of other expenses
to average assets was 2.60 percent in 1999 compared to 2.46 percent in 1998 and
2.21 percent in 1997.
The level of operating expenses during 1998 was unfavorably impacted by an
increase in all expense categories listed in the table above, except for
premises and equipment expenses. The level of operating expenses during 1997
was favorably impacted by lower marketing and advertising expenses, as well as
the reduction of stationery and printing expenses.
Salaries and employee benefits increased $767,000 or 12.8 percent in 1999,
primarily the result of higher staffing levels, increased benefit costs and
merit and promotional raises. In 1998 these expenses increased $518,000
primarily due to the increased expense arising from merit and promotional
raises and higher benefit costs. Staffing levels overall increased to 162 at
December 31, 1999 from 153 full-time equivalent employees at December 31, 1998.
Increases in staffing levels were required to support the Bank's expanded
branch facilities, specifically in 1999 our newly expanded Springfield
22
<PAGE>
Office and new Summit Banking Center. The Corporation continues to ensure that
staffing levels are sufficient to meet the Corporation's strategic initiatives
and to support providing quality service to our customers. Employees' longevity
has continued to play an important part. As of December 31, 1999, the
Corporation's employees, excluding officers, have been employed by the
Corporation for an average of 229 weeks or 4.4 years. This factor contributes
to the Corporation's continued productivity, as evidenced by the ratio of
average assets per full time-equivalent employee, which amounted to $3.1
million, $3.1 million and $3.4 million in 1999, 1998 and 1997, respectively.
Occupancy and bank premises and equipment expense increased by $239,000 or
10.1 percent in 1999 over 1998. This increase in 1999 expense reflects the
ongoing impact on operating costs of expanded facilities. The increase in such
expenses of $4,000 or 0.2 percent in 1998 from 1997.
Other expenses increased by $542,000 or 22.6 percent in 1999 over 1998.
This increase in 1999 expense reflects the legal and consulting costs
recognized in 1999 with the formation of a subsidiary and the liquidation of
another subsidiary. Telephone, computer and loan operating expenses also
increased as a result of the addition and expansion of branch facilities and
increased loan volume.
INCOME TAXES
The Corporation's provision for income taxes decreased from 1998 to 1997
primarily as a result of decreased taxable income and increased from 1998 to
1999 primarily as a result of higher amounts of taxable income. The effective
tax rates for the Corporation for the periods ended December 31, 1999, 1998 and
1997 were 33.7 percent, 33.9 percent and 33.0 percent, respectively. The
effective tax rate continues to be less than the combined statutory Federal tax
rate of 34 percent and the New Jersey State tax rate of 9 percent. The
difference between the statutory and effective tax rates primarily reflects the
tax-exempt status of interest income on obligations of states and political
subdivisions and disallowed expense items for tax purposes, such as travel and
entertainment expense, as well as amortization of goodwill. Tax-exempt interest
income, on a tax-equivalent basis, increased by $237,000 or 22.3 percent from
1998 to 1999, and declined by $387,000 or 26.7 percent from 1997 to 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 AND SFAS 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,
(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.
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.
23
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
In June 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.
On January 1, 2000 the Corporation adopted SFAS 133 and SFAS 137. The
transition provisions contained in SFAS 133 provide that at the date of initial
application, an entity may transfer any debt security classified as "held to
maturity (HTM)" to "available-for-sale (AFS)" or "trading". On the initial
adoption date of SFAS 133 as amended by SFAS 137, the Bank transferred
$25,357,952 (amortized cost) of its securities previously classified as held to
maturity to the available-for-sale classification. The related unrealized net
gain as of transfer date was $5,109, which has been recognized in the
comprehensive income component of stockholders' equity, as the cumulative
effect of adopting the new accounting principles.
YEAR 2000 CENTURY DATE CHANGE
As of December 31, 1999 the Corporation believed it was Year 2000
compliant and subsequently did not experience any internal Year 2000 compliance
exceptions nor disruptions to operations. The cost of Year 2000 compliance
through December 31, 1999 amounted to $443,400, lower than the original
estimate of $470,000.
ASSET AND LIABILITY MANAGEMENT
Asset and Liability management encompasses an analysis of market risk, the
control of interest rate risk (interest sensitivity management) and the ongoing
maintenance and planning of liquidity and capital. The composition of the
Corporation's statement of condition is planned and monitored by the Asset and
Liability Committee (ALCO). In general, management's objective is to optimize
net interest income and minimize market risk and interest rate risk by
monitoring these components of the statement of condition.
INTEREST SENSITIVITY
MARKET RISK
"Market risk" represents the risk of loss from adverse changes in market
prices and rates. The Corporation's market rate risk arises primarily from
interest rate risk inherent in its investing, lending and deposit taking
activities. To that end, management actively monitors and manages its interest
rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest
rates. A sudden and substantial increase or decrease in interest rates may
adversely impact the Corporation's earnings to the extent that the interest
rates borne by assets and liabilities do not similarly adjust. The
Corporation's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Corporation's net
interest income and capital, while structuring the Corporation's
asset-liability structure to obtain the maximum yield-cost spread on that
structure. The Corporation relies primarily on its asset-liability structure to
control interest rate risk. The Corporation continually evaluates interest rate
risk management opportunities, including the use of derivative financial
instruments. The management of the Corporation believes that hedging
instruments currently available are not cost-effective, and therefore, has
focused its efforts on increasing the Corporation's yield-cost spread through
wholesale and retail growth opportunities.
24
<PAGE>
The Corporation monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of the Corporation's
exposure to differential changes in interest rates between assets and
liabilities is the Corporation's analysis of its interest rate sensitivity.
This test measures the impact on net interest income and on net portfolio value
of an immediate change in interest rates in 100 basis point increments. Net
portfolio value is defined as the net present value of assets, liabilities, and
off-balance sheet contracts.
The primary tool used by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations
reflecting changes in interest rates over one and two-year time horizons has
enabled management to develop and initiate strategies for managing exposure to
interest rate risk. In its simulations, management estimates the impact on net
interest income of various changes in interest rates. Projected net interest
income sensitivity to movements in interest rates is modeled based on both an
immediate rise or fall in interest rates ("rate shock"), as well as gradual
changes in interest rates over a 12 month time period. The model is based on
the actual maturity and repricing characteristics of interest-rate sensitive
assets and liabilities. The model incorporates assumptions regarding
earning-asset and deposit growth, prepayments, interest rates and other
factors. Management believes that both individually and in the aggregate these
assumptions are reasonable, but the complexity of the simulation modeling
process results in a sophisticated estimate, not an absolutely precise
calculation of exposure. For example, estimates of future cash flows must be
made for instruments without contractual maturity or payment schedules.
Based on the results of the interest simulation model as of December 31,
1999, Center Bancorp, Inc. would expect a decrease of 8.90 percent in net
interest income and an increase of 7.53 percent in net interest income if
interest rates increase or decrease by 200 basis points, respectively, from
current rates in an immediate and parallel shock over a twelve month period.
Short-term interest rate exposure analysis is supplemented with an
interest sensitivity gap model. The Corporation utilizes interest sensitivity
analysis to measure the responsiveness of net interest income to changes in
interest rate levels. 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. 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 failing
rate environment.
25
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
From time to time, the Corporation may elect to deliberately mismatch
liabilities and assets in a strategic gap position.
At December 31, 1999, the Corporation reflects a negative interest
sensitivity gap (or an interest sensitivity ratio) of .40:1.00: 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 has 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, and is expected to continue to
be, placed on interest-sensitivity matching with the objective of stabilizing
the net interest spread during 2000. However, no assurance can be given that
this objective will be met.
The following table depicts the Corporation's interest rate sensitivity
position at December 31, 1999:
Expected Maturity/Principal Repayment December 31,
<TABLE>
<CAPTION>
Average Year Year Year
Interest End End End
(dollars in thousands) Rate 2000 2001 2002
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans 7.61% $ 49,743 $ 15,492 $ 11,593
Investments 6.46% 97,911 52,168 26,598
- -------------------------------------------------------------------------------------------
Total interest-earning assets $ 147,654 $ 67,660 $ 38,191
- -------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater 4.95% $ 43,258 $ 270 $ 0
Time certificates of deposit of
less than $100,000 4.85% 54,824 2,055 0
Other interest bearing
deposits 2.28% 190,301 1,694 1,911
Securities sold under
agreements to repurchase
and FHLB advances 4.24% 80,752 0 0
- -------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 369,135 $ 4,019 $ 1,911
- -------------------------------------------------------------------------------------------
Cumulative interest-earning
assets 147,654 215,314 253,505
Cumulative interest-bearing
liabilities 369,135 373,154 375,065
Rate sensitivity gap (221,481) 63,641 36,280
Cumulative rate sensitivity
gap $ (221,481) $ (157,840) $ (121,560)
- -------------------------------------------------------------------------------------------
Cumulative gap ratio 0.40% 0.58% 0.68%
===========================================================================================
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Year Year 2005 Estimated
End End And Total Fair
(dollars in thousands) 2003 2004 Thereafter Balance Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Loans $ 8,684 $ 7,720 $ 74,434 $ 167,666 $165,371
Investments 27,506 27,040 72,717 303,940 297,032
- --------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 36,190 $ 34,760 $ 147,151 $ 471,606 $462,403
- --------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater $ 0 $ 0 $ 113 $ 43,641 $ 43,640
Time certificates of deposit of
less than $100,000 0 0 0 56,879 56,857
Other interest bearing
deposits 0 0 0 193,906 193,906
Securities sold under
agreements to repurchase
and FHLB advances 0 0 0 80,752 80,731
- --------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 0 $ 0 $ 113 $ 375,178 $375,134
- --------------------------------------------------------------------------------------------------------
Cumulative interest-earning
assets 289,695 324,455 471,606 471,606
Cumulative interest-bearing
liabilities 375,065 375,065 375,178 375,178
Rate sensitivity gap 36,190 34,760 147,038 96,428
Cumulative rate sensitivity
gap $ (85,370) $ (50,610) $ 96,428 $ 96,428
- --------------------------------------------------------------------------------------------------------
Cumulative gap ratio 0.77% 0.87% 1.26% 1.26%
========================================================================================================
</TABLE>
The table above indicates the time period in which interest-earning assets
and interest-bearing liabilities will mature or may reprice in accordance with
their contractual terms. However, this table does not necessarily indicate the
impact of general interest rate movements on the Corporation's net interest
yield because the repricing of various categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
various assets and liabilities indicated as repricing within the same period
may in fact reprice at different times and at different rate levels.
26
<PAGE>
Expected maturities are contractual maturities adjusted for prepayments of
principal based on current market indices. The Corporation uses certain
assumptions to estimate fair values and expected maturities. For assets,
expected maturities are based upon contractual maturity, projected repayments
and prepayments of principal. For deposits, contractual maturities are assumed
for certificates of deposit while other interest-bearing deposits were treated
as if subject to immediate withdrawal.
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 reduced. Management also maintains a detailed liquidity
contingency plan designed to adequately respond to situations which could lead
to liquidity concerns.
The Corporation derives a significant proportion of its liquidity from its
core deposit base. At December 31, 1999, core deposits, as defined by the
Corporation, (comprised of total demand and savings accounts plus money market
accounts under $100,000)represented 61.0 percent of total deposits. More
volatile rate sensitive deposits, concentrated in certificates of deposit
$100,000 and greater, decreased to 11.2 percent of total deposits from 14.1
percent at December 31, 1998. This change was due to a shift to lower costing
and more stable sources of funds, primarily borrowings from the Federal Home
Loan Bank of New York and securities sold under agreements to repurchase. The
following table depicts the Corporation's core deposit mix at December 31, 1999
and 1998:
CORE DEPOSIT MIX
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 Net Change
(dollars in thousands) Amount Percentage Amount Percentage Volume 99 vs. 98
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand Deposits $ 94,829 39.8 $ 82,072 37.2 $ 12,757
Interest-Bearing Demand 45,786 19.2 40,579 18.4 5,207
Regular Savings 71,103 29.9 74,123 33.6 (3,020)
Money Market Deposits under $100 26,399 11.1 23,776 10.8 2,623
- --------------------------------------------------------------------------------------------------------------------
Total core deposits $ 238,117 100.0 $ 220,550 100.0 $ 17,567
- --------------------------------------------------------------------------------------------------------------------
Total deposits $ 389,255 $ 377,167 $ 12,088
- --------------------------------------------------------------------------------------------------------------------
Core deposits to total deposits 61% 58%
====================================================================================================================
</TABLE>
Short-term borrowings can be used to satisfy daily funding needs. Balances
in those accounts fluctuate on a day-to-day basis. The Corporation's principal
short-term funding sources are securities sold under agreement to repurchase.
Average short-term borrowings during 1999 amounted to approximately $19.5
million, an increase of $11.0 million or 130.4 percent from the 1998 period.
27
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The following table is a summary of securities sold under repurchase
agreements for each of the last three years.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities sold under repurchase agreements:
Average Interest rate:
At year end 3.09% 3.71% 6.75%
For the year 3.24% 3.40% 5.68%
Average amount outstanding during the year: $19,484 $ 8,455 $10,858
Maximum amount outstanding at any month end: $30,752 $15,063 $27,320
Amount outstanding at year end: $30,752 $11,602 $ 700
===================================================================================
</TABLE>
CASH FLOWS
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. During
1999 cash and cash equivalents (which increased overall by $2.7 million) were
provided (on a net basis) by operating and financing activities and used (on a
net basis) in investing activities. Cash flows from operating activities,
primarily net income, and financing activities, primarily increases in
borrowings and deposits, were used in investing activities, primarily the
increased volume of loans and investment securities.
STOCKHOLDERS' EQUITY
Stockholders' equity averaged $37.2 million during 1999, an increase of
$1.7 million, or 4.8 percent, as compared to 1998. At December 31, 1999,
stockholders' equity totaled $36.5 million, a decrease of $120,000 from
December 31, 1998. Such decrease resulted from $3.0 million of net unrealized
losses on securities available-for-sale, offset by net increases of $2.8
million attributable to net income and issuance of common stock less cash
dividends paid. The Corporation's dividend reinvestment and optional stock
purchase plan contributed $318,000 in new capital during 1999. Book value per
share at year end 1999 was $9.62 compared to $9.75 at year end 1998. Tangible
book value at year end 1999 was $8.90 compared to $8.94 for 1998.
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
At December 31, 1999, the Corporation's total Tier l capital (defined as
tangible stockholders' equity for common stock and certain perpetual preferred
stock) amounted to $33.4 million or 6.55 percent of total assets. The Tier I
leverage capital ratio was 6.93 percent of total average assets. Tier I capital
excludes the effect of SFAS No. 115, which amounted to $1,877,000 of net
unrealized losses, after tax, on securities available-for-sale (reported as a
component of accumulated other comprehensive income which is included in
stockholders' equity) and goodwill of $2,736,000 as of December 31, 1999. For
information on goodwill, see Note 2 to the Consolidated Financial Statements.
28
<PAGE>
United States bank regulators have additionally issued guidelines
establishing minimum capital standards related to the level of assets and off
balance-sheet exposures adjusted for credit risk. Specifically, these
guidelines categorized assets and off balance-sheet items into four
risk-weightings and require banking institutions to maintain a minimum ratio of
capital to risk-weighted assets. At December 31, 1999, the Corporation's
estimated Tier I and total risk-based capital ratios were 15.4 percent and 16.1
percent, respectively. These ratios are well above the minimum guidelines of
capital to risk-adjusted assets in effect as of December 31, 1999. For
information on risk-based capital and regulatory guidelines for the Bank, see
Note 10 to the Consolidated Financial Statements.
SECURITY MARKET INFORMATION
The common stock of the Corporation is traded on the NASDAQ Stock Market,
effective as of June 24, 1996. The Corporation's symbol is CNBC. As of December
31, 1999, the Corporation had 603 common stockholders of record. This does not
include beneficial owners for whom CEDE & Company or others act as nominees. On
December 31, 1999, the closing market bid and ask price was $15.00-$15.63,
respectively. Since June 24, 1996, prices were reported by NASDAQ. For prior
years the high and low bid prices were reported by National Quotation Bureau.
The following table sets forth the high and low bid prices, and dividends
declared for the Corporation's common stock during the periods indicated.
<TABLE>
<CAPTION>
Common Stock Price Common
1999 1998 Dividends Declared
- --------------------------------------------------------------------------------------------------
High Low High Low
Bid Bid Bid Bid 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter $ 15.38 $ 13.00 $ 17.14 $ 15.00 $ 0.150 $ 0.143
Third Quarter $ 14.75 $ 13.25 $ 17.38 $ 14.41 $ 0.143 $ 0.127
Second Quarter $ 15.72 $ 14.13 $ 19.05 $ 17.14 $ 0.143 $ 0.127
First Quarter $ 15.95 $ 14.28 $ 17.45 $ 14.77 $ 0.143 $ 0.127
- --------------------------------------------------------------------------------------------------
$ 0.579 $ 0.524
==================================================================================================
</TABLE>
For information on dividend restrictions and capital requirements which
may limit the ability of the Corporation to pay dividends, see Note 13 to the
Consolidated Financial Statements. Dividends declared on common stock, (on a
per share basis) and stock prices have been adjusted for the 5 percent stock
dividend distributed on June 1, 1999, and the three-for-two stock split
distributed in May of 1998 and the 5 percent stock dividend distributed in May
of 1997.
LOOKING FORWARD
One of the Corporation's primary objectives is to achieve balanced asset
and revenue growth, and at the same time expand market presence and diversify
its financial products. However, it is recognized that objectives, no matter
how focused, are subject to factors beyond the control of the Corporation which
can impede its ability to achieve these goals. The following factors should be
considered when evaluating the Corporation's ability to achieve its objectives:
The financial market place is rapidly changing. Banks are no longer the
only place to obtain loans, nor the only place to keep financial assets. The
banking industry has lost market share to other financial service providers.
The future is predicated on the Corporation's ability to adapt its products,
provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably
or unfavorably by changes in interest rates. Although the impact of interest
rate fluctuations is mitigated by ALCO strategies, significant changes in
interest rates can have an adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by
changes in the regional and local economy. Although the Corporation sets aside
loan loss provisions toward the allowance for loan losses, significant
unfavorable changes in the economy could impact the assumptions used in the
determination of the adequacy of the allowance.
29
<PAGE>
LOGO Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Technological changes will have a material impact on how financial service
companies compete for and deliver services. It is recognized that these changes
will have a direct impact on how the marketplace is approached and ultimately
on profitability. The Corporation has already taken steps to improve its
traditional delivery channels. However, continued success will likely be
measured by the ability to react to future technological changes.
Non-historical statements contained in this Annual Report constitute
forward looking statements under the Private Securities Litigation Reform Act
of 1995. Sometimes these statements contain words such as, "may," "believe,"
"expect," "continue," "intend," "anticipate," "plan," "seek," "estimate" or
other similar words. Actual results could differ materially from those
projected in the Corporation's forward-looking statements due to numerous known
and unknown risks and uncertainties, including the factors referred to above
and in other sections of this Annual Report.
30
<PAGE>
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax-equivalent basis) Balance Expense Rate Balance Expense Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable $281,582 $18,585 6.60% $281,312 $18,512 6.58%
Non-taxable 19,128 1,298 6.79% 14,994 1,061 7.08%
Federal funds sold and
securities purchased under
agreement to resell 8,813 452 5.13% 9,986 550 5.51%
Loans, net of unearned
income:(2) 160,208 12,198 7.61% 138,967 10,924 7.86%
- ------------------------------------------------------------------------------------------------------------
Total interest-earning assets: 469,731 32,533 6.93% 445,259 31,047 6.97%
- ------------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 13,798 12,285
Other assets 18,496 17,569
Allowance for possible loan
losses (1,359) (1,314)
- ------------------------------------------------------------------------------------------------------------
Total non-interest
earning assets 30,935 28,540
- ------------------------------------------------------------------------------------------------------------
Total assets $500,666 $473,799
- ------------------------------------------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market deposits $ 69,831 2,148 3.08% $ 60,061 1,776 2.96%
Savings deposits 74,393 1,449 1.95% 75,329 1,666 2.21%
Time deposits 122,478 5,676 4.63% 152,749 7,942 5.20%
Other interest-bearing deposits 46,378 740 1.60% 43,077 767 1.78%
Short term borrowings and
FHLB advances 62,713 2,788 4.45% 30,675 1,422 4.64%
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 375,793 12,801 3.41% 361,891 13,573 3.75%
- ------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 84,140 72,564
Other non-interest bearing
deposits 397 438
Other liabilities 3,138 3,410
- ------------------------------------------------------------------------------------------------------------
Total non-interest bearing
liablilities 87,675 76,412
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity 37,198 35,496
- ------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $500,666 $473,799
- ------------------------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $19,732 $17,474
- ------------------------------------------------------------------------------------------------------------
Net interest spread 3.52% 3.22%
- ------------------------------------------------------------------------------------------------------------
Net interest income as percent of
earning assets (margin) 4.20% 3.92%
- ------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (3) (441) (361)
- ------------------------------------------------------------------------------------------------------------
Net interest income $19,291 $17,113
============================================================================================================
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
(dollars in thousands) 1997
- --------------------------------------------------------------------------
Interest
Average Income/ Yield/
(tax-equivalent basis) Balance Expense Rate
- --------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable $290,002 $19,211 6.62%
Non-taxable 19,847 1,448 7.30%
Federal funds sold and
securities purchased under
agreement to resell 9,866 548 5.55%
Loans, net of unearned
income:(2) 125,476 9,980 7.96%
- -------------------------------------------------------------------------
Total interest-earning assets: 445,191 31,187 7.01%
- -------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 15,570
Other assets 19,432
Allowance for possible loan
losses (1,280)
- -------------------------------------------------------------------------
Total non-interest
earning assets 33,722
- -------------------------------------------------------------------------
Total assets $478,913
- -------------------------------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market deposits $ 56,668 1,562 2.76%
Savings deposits 80,635 1,961 2.43%
Time deposits 177,739 9,507 5.35%
Other interest-bearing deposits 45,687 840 1.84%
Short term borrowings and
FHLB advances 10,858 617 5.68%
- -------------------------------------------------------------------------
Total interest-bearing liabilities 371,587 14,487 3.90%
- -------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 71,974
Other non-interest bearing
deposits 364
Other liabilities 3,134
- -------------------------------------------------------------------------
Total non-interest bearing
liablilities 75,472
- -------------------------------------------------------------------------
Stockholders' equity 31,854
- -------------------------------------------------------------------------
Total liabilities and
stockholders' equity $478,913
- -------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $16,700
- -------------------------------------------------------------------------
Net interest spread 3.11%
- -------------------------------------------------------------------------
Net interest income as percent of
earning assets (margin) 3.75%
- -------------------------------------------------------------------------
Tax-equivalent adjustment (3) (481)
- -------------------------------------------------------------------------
Net interest income $16,219
=========================================================================
</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
(3) The tax-equivalent adjustment was computed based on a statutory Federal
income tax rate of 34 percent.
31
<PAGE>
LOGO Center Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3) $ 18,675 $ 15,975
Investment securities held to maturity (approximate market
value of $176,542 in 1999 and $174,184 in 1998) 183,450 172,014
Investment securities available-for-sale 120,490 115,952
- --------------------------------------------------------------------------------------------
Total investment securities (Note 4) 303,940 287,966
Loans, net of unearned income (Note 5) 169,089 150,099
Less--Allowance for loan losses (Note 5) 1,423 1,326
- --------------------------------------------------------------------------------------------
Net loans 167,666 148,773
Premises and equipment, net (Note 6) 9,778 9,426
Accrued interest receivable 4,727 4,120
Other assets (Note 9) 2,102 815
Goodwill (Note 2) 2,736 3,059
- --------------------------------------------------------------------------------------------
Total assets $509,624 $470,134
- --------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Non-interest bearing $ 94,829 $ 82,072
Interest bearing:
Certificates of deposit $100,000 and over 43,641 53,056
Savings and Time Deposits 250,785 242,039
- --------------------------------------------------------------------------------------------
Total Deposits 389,255 377,167
Federal funds purchased and securities sold under agreements to
repurchase (Note 7) 30,752 12,602
Federal Home Loan Bank Advances (Note 7) 50,000 40,000
Accounts payable and accrued liabilities (Notes 8 and 9) 3,104 3,734
- --------------------------------------------------------------------------------------------
Total liabilities 473,111 433,503
- --------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY (Notes 10 and 13)
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,253,441 and 4,232,169
shares in 1999 and 1998, respectively 10,760 7,616
Additional paid in capital 3,807 3,660
Retained earnings 25,568 25,978
Treasury stock at cost (458,964 and 475,112 shares in 1999
and 1998, respectively) (1,674) (1,736)
Restricted stock (Note 8) (71) 0
Accumulated other comprehensive (loss) income (1,877) 1,113
- --------------------------------------------------------------------------------------------
Total stockholders' equity 36,513 36,631
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $509,624 $470,134
============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 12,198 $ 10,924 $ 9,980
Interest and dividends on investment securities:
Taxable interest income 18,241 18,315 19,173
Non-taxable interest income 857 700 967
Dividends 344 197 38
Interest on Federal funds sold and securities purchased under
agreement to resell 452 550 548
- --------------------------------------------------------------------------------------------------------------
Total interest income 32,092 30,686 30,706
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on certificates of deposit $100,000 and over 2,703 4,301 5,836
Interest on other deposits 7,310 7,850 8,034
Interest on borrowings 2,788 1,422 617
- --------------------------------------------------------------------------------------------------------------
Total interest expense 12,801 13,573 14,487
- --------------------------------------------------------------------------------------------------------------
Net interest income 19,291 17,113 16,219
Provision for loan losses (Note 5) 108 120 0
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 19,183 16,993 16,219
- --------------------------------------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees 863 748 638
Other income 228 223 139
(Loss) gain on securities sold (Note 4) (2) 0 334
- --------------------------------------------------------------------------------------------------------------
Total other income 1,089 971 1,111
- --------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits (Note 8) 6,772 6,005 5,487
Occupancy, net (Note 14) 1,251 1,063 1,015
Premises and equipment (Notes 6 and 14) 1,348 1,297 1,341
Stationery and printing 471 438 254
Marketing and advertising 504 446 337
Other 2,944 2,402 2,162
- --------------------------------------------------------------------------------------------------------------
Total other expense: 13,290 11,651 10,596
- --------------------------------------------------------------------------------------------------------------
Income before income tax expense 6,982 6,313 6,734
Income tax expense (Note 9) 2,353 2,141 2,223
- --------------------------------------------------------------------------------------------------------------
Net income $ 4,629 $ 4,172 $ 4,511
- --------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.23 $ 1.12 $ 1.22
Diluted $ 1.22 $ 1.10 $ 1.21
Weighted average common shares outstanding:
Basic 3,775,846 3,741,478 3,710,804
Diluted 3,799,680 3,777,390 3,738,236
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33
<PAGE>
LOGO Center Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------
Common
Stock Common Additional
(in thousands, Shares Stock Paid In Retained
except share data) Outstanding Amount Capital Earnings
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1996 3,355,936 $ 4,468 $3,510 $ 23,738
- ------------------------------------------------------------------------------------------
YEAR 1997
Cash dividend (1,863)
Common stock dividend 167,863 2,557 (2,557)
Issuance of common stock 17,566 271
Exercise of stock options 806 3
Comprehensive income:
Net income 4,511
Unrealized holding gains on
securities arising during the
period (net of tax of $300)
Less reclassification adjustment
for gains included in net
income (net of tax of $114)
Net unrealized holding gain on
securities arising during the
period (net of tax $186)
Total comprehensive income
- ------------------------------------------------------------------------------------------
Balance December 31, 1997 3,542,171 $ 7,296 $3,513 $ 23,829
- ------------------------------------------------------------------------------------------
YEAR 1998
Cash dividend (2,023)
Issuance of common stock 18,264 320
Exercise of stock options 17,714 147
Comprehensive income:
Net income 4,172
Unrealized holding gain on secu-
rities arising during the period
(net of taxes of $347)
Total comprehensive income
- ------------------------------------------------------------------------------------------
Balance December 31, 1998 3,578,149 $ 7,616 $3,660 $ 25,978
- ------------------------------------------------------------------------------------------
YEAR 1999
Cash Dividend (2,213)
Common stock dividend 179,260 2,826 (2,826)
Issuance of common stock 20,920 318
Exercise of stock options 11,600 93
Restricted stock award 4,548 54
Comprehensive income:
Net income 4,629
Unrealized holding losses on
securities arising during the
period (net of taxes of
($1,540))
Less reclassification adjustment
for losses included in net
income (net of tax benefit $1)
Net unrealized holding loss on
securities arising during the
period (net of tax of ($1,541))
Total comprehensive income
- ------------------------------------------------------------------------------------------
Balance December 31,1999 3,794,477 $10,760 $3,807 $ 25,568
==========================================================================================
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
- -----------------------------------------------------------------------------------------------
Accumulated
Other Stock-
(in thousands, Treasury Restricted Comprehensive holders'
except share data) Stock Stock Income Equity
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1996 $ (1,814) $ 0 $ 311 $ 30,213
- ---------------------------------------------------------------------------------------------
YEAR 1997
Cash dividend (1,863)
Common stock dividend
Issuance of common stock 271
Exercise of stock options 6 9
Comprehensive income:
Net income 4,511
Unrealized holding gains on
securities arising during the
period (net of tax of $300) 501
Less reclassification adjustment
for gains included in net
income (net of tax of $114) 220
--------
Net unrealized holding gain on
securities arising during the
period (net of tax $186) 281 281
--------
Total comprehensive income 4,792
- ---------------------------------------------------------------------------------------------
Balance December 31, 1997 $ (1,808) $ 0 $ 592 $ 33,422
- ---------------------------------------------------------------------------------------------
YEAR 1998
Cash dividend (2,023)
Issuance of common stock 320
Exercise of stock options 72 219
Comprehensive income:
Net income 4,172
Unrealized holding gain on secu-
rities arising during the period
(net of taxes of $347) 521 521
-------- --------
Total comprehensive income 4,693
- ---------------------------------------------------------------------------------------------
Balance December 31, 1998 $ (1,736) $ 0 $ 1,113 $ 36,631
- ---------------------------------------------------------------------------------------------
YEAR 1999
Cash Dividend (2,213)
Common stock dividend
Issuance of common stock 318
Exercise of stock options 45 138
Restricted stock award 17 (71)
Comprehensive income:
Net income 4,629
Unrealized holding losses on
securities arising during the
period (net of taxes of
($1,540)) (2,991)
Less reclassification adjustment
for losses included in net
income (net of tax benefit $1) 1
--------
Net unrealized holding loss on
securities arising during the
period (net of tax of ($1,541)) (2,990) (2,990)
--------
Total comprehensive income 1,639
- ---------------------------------------------------------------------------------------------
Balance December 31,1999 $ (1,674) $ (71) $ (1,877) $ 36,513
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,629 $ 4,172 $ 4,511
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 1,465 1,413 1,484
Provision for loan losses 108 120 0
Provision for deferred taxes (267) 108 433
(Loss) gain on sale of investment securities available-for-sale (2) 0 334
(Increase) decrease in accrued interest receivable (607) 230 21
(Increase) decrease in other assets (1,020) (236) 197
(Decrease) increase in other liabilities (492) 973 629
Amortization of premium and accretion of discount on
investment securities, net 7 179 217
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,821 6,959 7,826
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale 25,871 63,914 10,321
Proceeds from maturities of investment securities held to maturity 54,178 80,494 69,813
Proceeds from sales of investment securities available-for-sale 2,997 0 26,153
Purchase of securities available-for-sale (35,743) (63,817) (84,256)
Purchase of securities held to maturity (66,272) (69,917) (40,468)
Net increase in loans (19,001) (17,738) (14,618)
Property and equipment expenditures, net (1,494) (1,386) (186)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (39,464) (8,450) (33,241)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 12,088 (58,843) 9,356
Dividends paid (2,213) (2,023) (1,863)
Proceeds from issuance of common stock 318 320 271
Net increase in short-term borrowings 28,150 51,902 700
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 38,343 (8,644) 8,464
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,700 (10,135) (16,951)
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 15,975 26,110 43,061
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 18,675 $ 15,975 $ 26,110
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and short term borrowings $ 12,293 $ 13,465 $ 14,433
Income taxes $ 2,505 $ 2,005 $ 2,002
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
<PAGE>
LOGO Center Bancorp, Inc.
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 and its
subsidiaries (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 that period. Actual
results could differ significantly from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, Federal funds
sold, and securities purchased under agreements to resell. Generally, Federal
funds and securities purchased under agreements to resell are sold for one-day
periods.
INVESTMENT SECURITIES
The Corporation classifies investments into the following categories: (1)
held to maturity securities, for which the Corporation has both the positive
intent and ability to hold until maturity, are reported at amortized cost; (2)
trading securities, which are purchased and held principally for the purpose of
selling in the near term, are reported at fair value with unrealized gains and
losses included in earnings; and (3) available-for-sale securities, which do
not meet the criteria of the other two categories, are reported at fair value
with unrealized gains and losses, net of applicable income taxes, reported as a
component of accumulated other comprehensive income which is included in
stockholders' equity and excluded from earnings.
Investment securities held to maturity are adjusted for amortization of
premiums and accretion of discounts which are recognized on a level yield
method, as adjustments to interest income. Investment securities gains or
losses are determined using the specific identification method.
INCOME TAXES
The Corporation recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this
36
<PAGE>
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates expected to apply to taxable income in the
years in which the differences are expected to be settled.
LOANS
Loans are stated at their principal amounts less net deferred loan
origination fees. Interest income is credited as earned except when a loan
becomes past due 90 days or more and doubt exists as to the ultimate collection
of interest or principal; in those cases the recognition of income is
discontinued. 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.
The value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or at the fair value
of the collateral if the loan is collateral dependent. Impaired loans include,
at a minimum, non-accrual loans and loans internally classified as substandard
or below, in each instance above an established dollar threshold of $200,000.
All loans below the established dollar threshold are considered homogenous and
are considered in the Bank's credit evaluation process. At December 31, 1999,
total impaired loans were approximately $519,000, the Corporation did not have
any impaired loans at December 31, 1998 or 1997. Although classified as
substandard, the impaired loans were current with respect to principal and
interest payments.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined adequate
to provide for potential loan losses. The allowance is increased by provisions
charged to operations and reduced by loan charge-offs, net of recoveries. The
allowance is based on management's evaluation of the loan portfolio considering
economic conditions, the volume and nature of the loan portfolio, historical
loan loss experience and individual credit situations.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
The ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in the real estate market and economic
conditions in the State of New Jersey and the impact of such conditions on the
creditworthiness of the borrowers.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examinations.
BANK PREMISES AND EQUIPMENT
Land is carried at cost and bank premises and equipment at cost less
accumulated depreciation based on estimated useful lives of assets, computed
principally on the straight-line basis. Expenditures for maintenance and
repairs are charged to operations as incurred; major renewals and betterments
are capitalized. Gains and losses on sales or other dispositions are recorded
as other income or other expenses.
37
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PENSION PLAN
The Corporation has a non-contributory pension plan covering all eligible
employees. The Corporation's policy is to fund at least the minimum
contribution required by the Employee Retirement Income Security Act of 1974.
The costs associated with the plan are accrued based on actuarial assumptions
and included in non-interest expense.
STOCK BASED COMPENSATION
The Corporation accounts for stock options using the intrinsic value
method under APB opinion No. 25 and provides the required disclosures of fair
values under SFAS No. 123, "Accounting for Stock-Based Compensation."
EARNINGS PER SHARE
All share and per share amounts have been restated to reflect the 5% stock
dividend distributed on June 1, 1999, the three-for-two stock split distributed
in May of 1998 and the 5% stock dividend distributed in May 1997.
Basic Earnings Per Share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares as if all
potentially dilutive common shares were issued (e.g. stock options). The
Corporation's weighted average common shares outstanding for diluted EPS
include the effect of stock options outstanding using the Treasury Stock
Method, which are not included in the calculation of basic EPS.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $4,629 $4,172 $4,511
- --------------------------------------------------------------------------------------
Average number of common shares outstanding 3,776 3,741 3,711
Effect of dilutive options 22 36 27
Effect of restricted stock awards 2 0 0
- --------------------------------------------------------------------------------------
Average number of common shares outstanding used to
calculate diluted earnings per common share 3,800 3,777 3,738
======================================================================================
</TABLE>
TREASURY STOCK
Treasury stock is recorded using the cost method and accordingly is
presented as a reduction of stockholders' equity.
COMPREHENSIVE INCOME
Total comprehensive income includes all changes in equity during a period
from transactions and other events and circumstances from nonowner sources. The
Bank's other comprehensive income is comprised of unrealized holding gains and
losses on securities available-for-sale. Disclosure of comprehensive income for
the years ended 1999, 1998 and 1997 is presented in the Consolidated Statements
of Changes in Stockholders' Equity.
38
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 1998 and 1997 to conform to the classifications presented in
1999.
NOTE 2: ACQUISITION
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA
(Lehigh), a New Jersey chartered savings and loan association in a transaction
accounted for under the purchase method of accounting. At June 28, 1996, Lehigh
had assets of $70.9 million (primarily cash and cash equivalents of $53.0
million and loans of $15.0 million) and deposits and stockholders' equity of
$68.2 million and $2.7 million, respectively. The Corporation paid $5.5 million
in cash for Lehigh, resulting in goodwill of $3.8 million. The goodwill is
being amortized on a straight-line basis over 15 years. The consolidated
financial statements of the Corporation include assets, liabilities and results
of operations of Lehigh since the acquisition date.
NOTE 3: CASH AND DUE FROM BANKS
The subsidiary bank, Union Center National Bank, maintained cash balances
reserved to meet regulatory requirements of the Federal Reserve Board of
approximately $189,000 and $238,000 at December 31, 1999 and 1998,
respectively.
NOTE 4: INVESTMENT SECURITIES
The following tables present information related to the Corporation's
portfolio of securities held to maturity and available-for-sale at December 31,
1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999
- ----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. government and federal agency obligations $126,990 $108 $5,863 $121,235
Obligations of U.S. States and political subdivisions 36,939 53 879 36,113
Other securities 19,521 13 340 19,194
- ---------------------------------------------------------------------------------------------------------------
$183,450 $174 $7,082 $176,542
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
- ----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government and federal agency obligations $ 88,300 $100 $2,665 $ 85,735
Obligations of U.S. states and political subdivisions 13,674 4 374 13,304
Other securities 14,879 1 191 14,689
Equity securities 6,762 0 0 6,762
- ---------------------------------------------------------------------------------------------------------------
$123,615 $105 $3,230 $120,490
===============================================================================================================
</TABLE>
39
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4: INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
U.S. Government and federal agency obligations $123,581 $1,192 $228 $124,545
Obligations of U.S. states and political subdivisions 36,881 947 28 37,800
Other securities 11,552 287 0 11,839
- ---------------------------------------------------------------------------------------------------------------
$172,014 $2,426 $256 $174,184
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and federal agency obligations $ 88,493 $1,446 $94 $ 89,845
Obligations of U.S. States and political subdivisions 9,225 264 0 9,489
Other securities 12,375 237 0 12,612
Equity securities 4,006 0 0 4,006
- ---------------------------------------------------------------------------------------------------------------
$114,099 $1,947 $94 $115,952
===============================================================================================================
</TABLE>
The following table presents information for investments in securities
held to maturity and debt securities available-for-sale at December 31, 1999,
based on scheduled maturities. Actual maturities can be expected to differ from
scheduled maturities due to prepayment or early call privileges of the issuer.
<TABLE>
<CAPTION>
Held to Maturity Available-for-Sale
- -----------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
(dollars in thousands) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 69,655 $ 66,013 $ 42,723 $ 41,043
Due after one year through five years 75,346 73,632 65,628 64,445
Due after five years through ten years 21,169 20,251 4,218 3,942
Due after ten years 17,280 16,646 11,046 11,060
- ----------------------------------------------------------------------------------------------
$183,450 $176,542 $123,615 $120,490
==============================================================================================
</TABLE>
During 1999 securities sold from the Corporation's available-for-sale
portfolio amounted to approximately $3.0 million. The gross realized losses on
securities sold amounted to $2,400 in 1999. During 1998 the Corporation did not
sell any securities from its available-for-sale portfolio. Securities sold from
the Corporation's available-for-sale portfolio during 1997 amounted to $26.2
million. In 1997, the Corporation recognized gross gains on sale of securities
of $334,000. These securities were sold in the ordinary course of business.
Investment securities having a carrying value of approximately $63.9
million and $83.1 million at December 31, 1999 and 1998, respectively, were
pledged to secure public deposits, short-term borrowings, FHLB advances and for
other purposes required or permitted by law.
40
<PAGE>
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth the composition of the Corporation's loan
portfolio at December 31, 1999 and 1998, respectively.
(dollars in thousands) 1999 1998
- -------------------------------------------------------------
Real estate--residential mortgage $ 99,800 $ 91,189
Real estate--commercial 24,484 21,338
Commercial and industrial 37,377 30,844
Installment 7,100 5,642
All other 569 1,418
Less unearned income (241) (332)
- -------------------------------------------------------------
Loans, net of unearned income $169,089 $150,099
=============================================================
At December 31, 1999 and 1998 loans to officers and directors aggregated
approximately $3,506,000 and $3,485,000 respectively. During the year ended
December 31, 1999, the Corporation made new loans to officers and directors in
the amount of $2,369,000; payments by such persons during 1999 aggregated
$2,348,000. Management is of the opinion that the above loans were made on the
same terms and conditions as those prevailing for comparable transactions with
non-related borrowers.
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of year $1,326 $1,269 $1,293
Provision for loan losses 108 120 0
Loans charged-off (23) (70) (31)
Recoveries on loans previously charged-off 12 7 7
- ------------------------------------------------------------------------------
Balance at the end of year $1,423 $1,326 $1,269
==============================================================================
</TABLE>
Total non-performing assets, are comprised of the outstanding balances of
accruing loans which are 90 days or more past due as to principal or interest
payments, non-accrual loans and other real estate owned. Total non-performing
assets at December 31, 1999 and 1998 were as follows:
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------
Loans past due in excess of 90 days and still accruing $ 0 $ 24
Non-accrual loans 292 41
Other real estate owned 73 73
- -------------------------------------------------------------------------
Total non-performing assets $365 $138
=========================================================================
The amount of interest income that would have been recorded on non-accrual
loans in 1999, 1998 and 1997 had payments remained in accordance with the
original contractual terms, approximated $15,367, $3,000 and $2,800
respectively, while no interest income was received on these types of assets in
1999, 1998 and 1997, resulting in a loss of interest income of $15,367, $3,000
and $2,800, respectively.
At December 31, 1999, total impaired loans were approximately $519,000,
the Corporation did not have any impaired loans at December 31, 1998 or 1997.
Although classified as substandard, the impaired loans were current with
respect to principal and interest payments. The Corporation's total average
impaired loans during 1999 were $493,000 and $0 during 1998. Interest income on
impaired loans totaled $41,430 and $0 in 1999 and 1998, respectively.
41
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)
At December 31, 1999, there were no commitments to lend additional funds
to borrowers whose loans were non-accrual or contractually past due in excess
of 90 days and still accruing interest.
The Bank's policy is to generally grant commercial, mortgage, and
installment loans to New Jersey residents and businesses within its trading
area. The borrowers' abilities to repay their obligations are dependent upon
various factors including the borrowers' income and net worth, cash flows
generated by the borrowers' underlying collateral, value of the underlying
collateral, and priority of the Bank's lien on the property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Bank's control. The Bank is therefore subject to risk of loss. The Bank
believes its lending policies and procedures adequately minimize the potential
exposure to such risks and that adequate provisions for loan losses are
provided for all known and inherent risks. Collateral and/or personal
guarantees are required for virtually all loans.
NOTE 6: BANK PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at December 31, 1999
and 1998 follows:
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------
Land $ 1,649 $ 1,649
Buildings 6,017 5,653
Furniture, fixtures and equipment 8,549 7,778
Leasehold improvements 1,410 1,105
- -----------------------------------------------------------------------
Subtotal 17,625 16,185
Less accumulated depreciation and amortization 7,847 6,759
- -----------------------------------------------------------------------
Total $ 9,778 $ 9,426
=======================================================================
Depreciation expense for the three years ended December 31, 1999 amounted
to $1,142,743 in 1999, $1,090,733 in 1998 and $1,159,847 in 1997, respectively.
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
At December 31, 1999 advances from the Federal Home Loan Bank of New
York(FHLB) amounted to $50,000,000, compared to $40,000,000 at December 31,
1998. There were no FHLB advances outstanding at December 31, 1997. The FHLB
advances have a weighted average interest rate of 5.35 percent and 4.80 percent
at December 31, 1999 and December 31, 1998, respectively. These advances are
secured by pledges of FHLB stock, 1-4 family residential mortgages and U.S.
Government and Federal Agency obligations. The advances are subject to
quarterly call provisions at the discretion of FHLB while others have fixed
maturity dates and at December 31, 1999, and 1998 are scheduled for repayment
as follows:
(dollars in thousands) 1999 1998
- ------------------------------------------------
2000 $50,000 $ 0
2003 0 10,000
2008 0 30,000
- ------------------------------------------------
Total $50,000 $40,000
================================================
42
<PAGE>
Other borrowings consisting of securities sold under agreements to
repurchase had average balances of $19,484,000, $8,455,000, and $10,858,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. The maximum
amount outstanding at any month end during 1999, 1998 and 1997 respectively was
$30,752,000, $15,063,000 and $27,320,000
NOTE 8: PENSION AND BENEFITS
The Corporation maintains a non-contributory pension plan for
substantially all of its employees. The benefits are based on years of service
and the employee's compensation over the prior five-year period. The plan's
assets consist primarily of an insurance annuity. In addition, the Corporation
has a non-qualified retirement plan which is designed to supplement the pension
plan for key employees.
In 1998 the Corporation adopted a Director's Retirement Plan, which is
designed to provide retirement benefits for members of the Board of Directors.
The expense associated with the plan amounted to $116,359 for 1999 and 1998 and
is included in non-interest expense.
The following table sets forth change in projected benefit obligation,
change in fair value of plan assets, funded status, and amounts recognized in
the consolidated statements of condition for the Corporation's pension plans at
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Change in Benefit Obligation (dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year $ 4,578 $ 4,499
Service cost 335 332
Interest cost 334 328
Actuarial loss (gain) 414 (367)
Benefits paid (235) (214)
- -------------------------------------------------------------------------------
Projected benefit obligation at end year $ 5,426 $ 4,578
===============================================================================
Change in Plan Assets
- -------------------------------------------------------------------------------
Fair value of plan assets at beginning year $ 4,369 $ 3,981
Actual return on plan assets 281 415
Employer contributions 71 187
Benefits paid (235) (214)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,486 $ 4,369
===============================================================================
Funded status $ (940) $ (209)
Unrecognized net asset (10) (13)
Unrecognized prior service cost 125 140
Unrecognized net actuarial gain (540) (1,034)
- -------------------------------------------------------------------------------
Accrued benefit cost $ (1,365) $ (1,116)
===============================================================================
</TABLE>
The net periodic pension cost for 1999, 1998 and 1997 includes the
following components.
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Service cost $ 335 $ 332 $ 246
Interest cost 334 328 296
Actual return on plan assets (281) (415) (446)
Net amortization and deferral (69) 115 168
- ---------------------------------------------------------------
Net periodic pension expense $ 319 $ 360 $ 264
===============================================================
43
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8: PENSION AND BENEFITS (continued)
The following table presents the assumptions used to calculate the
projected benefit obligation in each of the last three years.
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.50% 7.50% 7.50%
Rate of compensation increase 6.50% 6.50% 6.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
========================================================================================
</TABLE>
401K BENEFIT PLAN
The Corporation maintains a 401K employee savings plan to provide for
defined contributions which covers substantially all employees of the Bank. The
Corporation's contributions to the plan are limited to fifty percent of a
matching percentage of each employee's contribution up to six percent of the
employee's salary. For 1999, 1998, and 1997, employer contributions amounted to
$74,099, $61,691 and $60,777, respectively.
STOCK OPTION PLANS
At the 1999 Annual Meeting of Shareholders, the shareholders approved the
adoption of the Center Bancorp, Inc. 1999 Employee Stock Incentive Plan. Under
this Plan an aggregate of 179,000 shares are authorized for issuance. Such
shares may be treasury shares or newly issued shares or a combination thereof.
This Plan permits Center Bancorp, Inc. common stock to be issued to key
employees and directors of the Corporation and its subsidiary. The options
granted under this Plan are intended to be either incentive stock options or
non-qualified options. This Plan also authorizes the grant of restricted stock
awards.
Options have been granted to purchase common stock principally at the fair
market value of the stock at the date of grant. Options are exercisable
starting one year after the date of grant and generally expire ten years from
the date of grant. Upon the exercise of options, proceeds received in excess of
the average treasury cost of the shares are credited to additional paid in
capital.
44
<PAGE>
Changes in options outstanding during the past three years were as
follows:
Exercise Price Range
Stock Option Plan Shares Per Share
- ---------------------------------------------------------------------
Outstanding, December 31, 1996,
(133,880 shares exercisable) 164,093 $10.95 to $11.77
Granted during 1997 15,629 $ 13.12
Exercised during 1997 (846) $ 10.95
Expired or canceled during 1997 0
- ---------------------------------------------------------------------
Outstanding, December 31, 1997,
(153,411 shares exercisable) 178,876 $10.95 to $13.12
Granted during 1998 0
Exercised during 1998 (18,600) $10.95 to $13.12
Expired or canceled during 1998 0
- ---------------------------------------------------------------------
Outstanding, December 31, 1998,
(150,125 shares exercisable) 160,276 $10.95 to $13.12
Granted during 1999 42,970 $ 15.50
Exercised during 1999 (11,700) $10.98 to $11.80
Expired or canceled during 1999 0
- ---------------------------------------------------------------------
Outstanding, December 31, 1999,
(143,370 shares exercisable) 191,546 $10.95 to $15.50
=====================================================================
Fair Value of Stock Options Grants
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model
The following weighted-average assumptions were used for the grants of
options in 1999:
o Dividend yield of 4.00%
o Expected volatility of 22.0%
o Risk-free interest rates based upon equivalent-term Treasury Rates
o Expected options lives were contractual lives at the date of grant
The following weighted-average assumptions were used for the grants of
options in 1997:
o Dividend yield of 3.70%
o Expected volatility of 44.3%
o Risk-free interest rates based upon equivalent-term Treasury Rates
o Expected options lives were the contractual lives at the date of grant
45
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8: PENSION AND BENEFITS (continued)
The following table summarizes the fair value of the stock options granted
during the last three years ended December 31, 1999. There were no grants of
stock options in 1998.
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Options Weighted Options Weighted Options Weighted
Granted Average Fair Granted Average Fair Granted Average Fair
Value Value Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Incentive stock options 0 $ 0 0 $0 0 $ 0
Non-qualifying stock options 42,970 $ 2.97 0 $0 0 $ 0
Director's plan 0 $ 0 0 $0 15,629 $ 5.54
- --------------------------------------------------------------------------------------------------------------------
Total 42,970 $ 2.97 0 $0 15,629 $ 5.54
====================================================================================================================
</TABLE>
Under APB Opinion 25, compensation cost for the stock options is not
recognized because the exercise price of the stock options equals the market
price of the underlying stock on the date of the grant. Had compensation
expense been recorded for stock options granted as determined under SFAS 123,
net income would have been reduced by approximately $30,450 in 1999, $19,000 in
1998 and 1997, which would have changed the Corporation's basic earnings per
share, by $.01 in 1999, 1998 and 1997 and would have reduced the diluted
earnings per share by $.01 in 1999 and 1997.
RESTRICTED STOCK
Restricted Stock may be awarded to key employees providing for the
immediate award of the Corporation's common stock subject to certain vesting
and other restrictions. During 1999, 4,548 shares were awarded and issued from
treasury shares to a trust. The Fair Value of the shares at the date of the
award will be amortized into salary expense over the vesting period. There were
no awards of restricted stock in 1998 or 1997. The amount of compensation costs
related to restricted stock awards included in salary expense amounted to
$7,000 in 1999. As of December 31, 1999, none of the restricted stock awards
were vested.
NOTE 9: INCOME TAXES
The current and deferred amounts of income tax expense for the years ended
December 31, 1999, 1998 and 1997, respectively, are as follows: (dollars in
thousands)
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------
CURRENT:
Federal $2,526 $1,871 $1,569
State 94 162 221
- -------------------------------------------------------------
2,620 2,033 1,790
- -------------------------------------------------------------
DEFERRED:
Federal (263) 108 433
State (4) 0 0
- -------------------------------------------------------------
Income tax expense $2,353 $2,141 $2,223
=============================================================
46
<PAGE>
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory Federal income tax rate is as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income tax expense $6,982 $ 6,313 $ 6,734
Federal statutory rate 34% 34% 34%
- -----------------------------------------------------------------------------------------
Compute "expected" Federal income tax expense 2,374 2,146 2,289
State tax net of Federal tax benefit 59 107 144
Decrease in valuation allowance (4) 0 0
Tax-exempt interest and dividends (291) (223) (298)
Other, net 215 111 88
- -----------------------------------------------------------------------------------------
Income tax expense $2,353 $ 2,141 $ 2,223
=========================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
1999 and 1998 are presented below.
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 289 $ 234
Pension expense 617 392
Organization cost 58 0
Unrealized losses on securities available-for-sale 1,248 0
Operating loss carry forward 0 35
- -------------------------------------------------------------------------------
Total gross deferred tax asset 2,212 661
Valuation allowance (54) (58)
- -------------------------------------------------------------------------------
Net deferred tax asset $2,158 $ 603
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 280 $ 283
Market discount accretion 97 69
Deferred fee expense-mortgages 206 190
Unrealized gains on securities available-for-sale 0 740
Other 19 20
- -------------------------------------------------------------------------------
Total gross deferred tax liabilities 602 1,302
- -------------------------------------------------------------------------------
Net deferred tax asset (liability) $1,556 $ (699)
===============================================================================
</TABLE>
Based on the Corporation's historical and current pre-tax earnings and the
availability of net operating loss carrybacks on a federal basis, management
believes it is more likely than not that the Corporation will realize the
benefit of the net deductible temporary differences existing at December 31,
1999 and 1998, respectively.
The valuation allowance is due to the state tax effect of the net
deductible temporary difference calculated on a separate company basis. The
valuation allowance for deferred tax assets as of December 31, 1999 was $54,000
compared to $58,000 in 1998.
NOTE 10: REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1999, 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.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution.
47
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10: REGULATORY CAPITAL REQUIREMENTS (continued)
Such actions could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification of
financial institutions into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well capitalized if
it has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at
least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
As of December 31, 1999, management believes that the Bank meets all
capital adequacy requirements to which it is subject and is a well-capitalized
institution under the prompt corrective action regulations.
The following is a summary of the Bank's actual capital amounts and ratios
as of December 31, 1999 and 1998, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
FDIC Requirements
- --------------------------------------------------------------------------------------------------------
Union Center National Minimum Capital For Classification
Bank Actuals Adequacy as Well Capitalized
- --------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Leverage (Tier 1) capital $35,496 6.90% $20,574 4.00% $25,717 5.00%
- --------------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1 35,496 14.61% 9,721 4.00% 14,582 6.00%
Total 36,919 15.19% 19,442 8.00% 24,303 10.00%
- --------------------------------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------------------------------
Leverage (Tier 1) capital $32,092 6.85% $18,760 4.00% $23,298 5.00%
- --------------------------------------------------------------------------------------------------------
Risk-based capital:
- --------------------------------------------------------------------------------------------------------
Tier 1 32,092 14.66% 8,633 4.00% 12,949 6.00%
Total 33,418 15.48% 17,625 8.00% 21,581 10.00%
========================================================================================================
</TABLE>
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that the Bank
disclose estimated fair values for its financial instruments. Fair value
estimates, methods, and assumptions are set forth below for the Corporation's
financial instruments:
The carrying amounts for cash and cash-equivalents approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of investment securities is estimated based on bid
quotations received from securities dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real
estate-mortgage, and installment loans. The fair value of performing loans,
except residential mortgages, is calculated by discounting scheduled cash flows
48
<PAGE>
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan. The estimate of
maturity is based on the Bank's historical experience with prepayments for each
loan classification, modified as required by an estimate of the effect of
current economic and lending conditions. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discount rates based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
The fair value of deposits with no stated maturity, such as
Non-interest-bearing demand deposits, savings and interest-bearing checking
accounts, and money market and checking accounts, is equal to the amount
payable on demand as of December 31, 1999 and 1998. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates of commitments to extend credit and standby
letters of credit are estimated at the fee charged by the Bank for similar
transactions. This amount is deemed to be immaterial.
Short-term borrowings that mature within six months have fair values equal
to their carrying value.
The fair value of FHLB advances is based on the discounted value of
estimated cash flows. The discount rate is estimated using the rates currently
offered for similar advances.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
liabilities,goodwill, and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered.
49
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(dollars in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 18,675 $ 18,675 $ 15,975 $ 15,975
Investments Available-for-Sale 120,490 120,490 115,952 115,952
Investments Held to Maturity 183,450 176,542 172,014 174,184
Net loans 167,666 165,371 148,773 150,621
FINANCIAL LIABILITIES:
Non-interest bearing deposits $ 94,829 $ 94,829 $ 82,072 $ 82,072
Interest-bearing deposits 294,426 294,403 295,095 296,170
Federal funds purchased, securities sold under
agreement to repurchase and FHLB advances $ 80,752 $ 80,731 $ 52,602 $ 50,402
==================================================================================================
</TABLE>
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS
Center Bancorp, Inc. operates its wholly-owned subsidiary, Union Center
National Bank. The earnings of this subsidiary are recognized by the
Corporation using the equity method of accounting. Accordingly, earnings are
recorded as increases in the Corporation's investment in the subsidiary and
dividends paid reduce the investment in the subsidiary. The ability of the
Corporation to pay dividends will largely depend upon the dividends paid to it
by the Bank. Dividends payable by the Bank to the Corporation are restricted
under supervisory regulations (see Note 13). Condensed financial statements of
the Parent Corporation only are as follows:
CONDENSED STATEMENTS OF CONDITION
At December 31,
- -----------------------------------------------------------------------
(dollars in thousands) 1999 1998
- -----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 144 $ 353
Investment in subsidiary 36,360 36,271
Other assets 578 548
- -----------------------------------------------------------------------
Total assets $37,082 $37,172
=======================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Other liabilities $ 569 $ 541
Stockholders' equity 36,513 36,631
- -----------------------------------------------------------------------
Total liabilities and stockholders' equity $37,082 $37,172
=======================================================================
50
<PAGE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For years ended December 31,
- -------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividend income from subsidiary $1,663 $1,720 $1,677
Management fees 59 50 43
- -------------------------------------------------------------------------------------
Total Income 1,722 1,770 1,720
Expenses 173 159 160
- -------------------------------------------------------------------------------------
Net income before equity in earnings of
subsidiary 1,549 1,611 1,560
Undistributed equity in earnings of subsidiary 3,080 2,561 2,951
- -------------------------------------------------------------------------------------
Net Income $4,629 $4,172 $4,511
=====================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For years ended December 31,
- --------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 4,629 $ 4,172 $ 4,511
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed equity in earnings of subsidiary (3,080) (2,561) (2,951)
Other, net (1) 31 (35)
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,548 1,642 1,525
- --------------------------------------------------------------------------------------------
Investing Activities:
Net cash used in investing activities 0 0 0
- --------------------------------------------------------------------------------------------
Financing Activities:
Cash Dividends (2,213) (2,023) (1,863)
Proceeds from exercise of stock options 138 219 9
Proceeds from issuance of common stock 318 320 271
- --------------------------------------------------------------------------------------------
Net cash used in financing activities (1,757) (1,484) (1,583)
- --------------------------------------------------------------------------------------------
Increase (decrease) in cash (209) 158 (58)
Cash and cash equivalents at beginning of year 353 195 253
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 144 $ 353 $ 195
============================================================================================
</TABLE>
NOTE 13: DIVIDENDS AND OTHER RESTRICTIONS
Certain restrictions, including capital requirements, exist on the
availability of undistributed net profits of the subsidiary bank for the future
payment of dividends to the Corporation. A dividend may not be paid if it would
impair the Bank's capital. Furthermore, prior approval by the Comptroller of
the Currency is required if the total of dividends declared in a calendar year
exceeds the total of the Bank's net profits for that year combined with its
retained profits for the two preceding years. At December 31, 1999, $10,311,600
was available for the payment of dividends.
51
<PAGE>
LOGO Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Corporation has outstanding
commitments and contingent liabilities such as commitments to extend credit,
including loan commitments of $36,991,000, ($36,475,000 subject to variable
rate indices and $516,000 fixed rate commitments) as of December 31, 1999.
Standby letters of credit, which are not reflected in the accompanying
consolidated financial statements, totaled $7,242,000 and $6,731,000 as of
December 31, 1999 and 1998, respectively. Commitments to extend credit and
standby letters of credit generally do not exceed one year. These financial
instruments involve, to varying degrees, elements of credit risk in excess of
the amounts recognized in the consolidated financial statements. The commitment
or contract amount of these financial instruments is an indicator of the
Corporation's level of involvement in each type of instrument as well as the
exposure to credit loss in the event of non-performance by the other party to
the financial instrument. The Corporation controls credit risk of these
financial instruments through credit approvals, limits and monitoring
procedures. To minimize potential credit risk the Corporation generally
requires collateral and other credit related terms and conditions from the
customer. In the opinion of management the financial condition of the
Corporation will not be materially affected by the final outcome of these
commitments and contingent liabilities.
A substantial portion of the Bank's loans are one to four family
residential first mortgage loans secured by real estate located in New Jersey.
Accordingly, the collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in the real estate market.
Non-interest expenses include rentals for premises and equipment of
$325,765 in 1999, $264,825 in 1998, and $203,168 in 1997. At December 31, 1999,
Center Bancorp, Inc. and its subsidiary were obligated under a number of
non-cancelable leases for premises and equipment, many of which provide for
increased rentals based upon increases in real estate taxes and the cost of
living index. These leases, most of which have renewal provisions, are
principally operating leases. Minimum rentals under the terms of these leases
for the years 2000 through 2004 are $353,664, $363,456, $379,286, $399,188, and
$420,208 respectively. Minimum rentals due 2005 and after are $636,987.
On November 18, 1999, the Corporation executed a Purchase Agreement with
the Town of Morristown, New Jersey in the amount of $751,000 to purchase at
public auction property located at 214 South Street. At that date, the
Corporation deposited the sum of $50,000 with the Town Officer conducting the
auction.
The Corporation is subject to claims and lawsuits which arise in the
ordinary course of business. Based upon the information currently available and
advice received from legal counsel representing the Corporation in connection
with such claims, 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.
52
<PAGE>
NOTE 15: QUARTERLY FINANCIAL INFORMATION CENTER BANCORP, INC., (unaudited)
<TABLE>
<CAPTION>
1999
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 8,453 $ 8,171 $ 7,928 $ 7,540
Total interest expense 3,479 3,283 3,090 2,949
Net interest income 4,974 4,888 4,838 4,591
Provision for loan losses 36 36 18 18
Other income 289 286 270 246
Other expense 3,500 3,347 3,312 3,132
Income before income taxes 1,727 1,791 1,778 1,687
Net income 1,166 1,162 1,170 1,131
Earnings per share:
Basic $ 0.31 $ 0.31 $ 0.31 $ 0.30
Diluted $ 0.31 $ 0.30 $ 0.31 $ 0.30
Weighted average common shares outstanding:
Basic 3,787,679 3,782,645 3,774,570 3,760,772
Diluted 3,810,573 3,810,573 3,798,112 3,787,237
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 7,676 $ 7,758 $ 7,727 $ 7,525
Total interest expense 3,125 3,406 3,577 3,465
Net interest income 4,551 4,352 4,150 4,060
Provision for loan losses 30 30 30 30
Other income 280 262 206 223
Other expense 3,130 3,101 2,843 2,577
Income before income taxes 1,671 1,483 1,483 1,676
Net income 1,104 979 956 1,133
Earnings per share:
Basic $ 0.29 $ 0.26 $ 0.26 $ 0.30
Diluted $ 0.29 $ 0.26 $ 0.25 $ 0.30
Weighted average common shares outstanding:
Basic 3,754,983 3,748,815 3,735,908 3,726,115
Diluted 3,787,151 3,777,723 3,773,821 3,770,864
- -------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
[GRAPHIC OMITTED]
The Board of Directors and Stockholders Center Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of
Center Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Center
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Short Hills, New Jersey
January 28, 2000
54
<PAGE>
A3. Exhibits
Organizational Chart
21.1 Subsidiaries of the Registrant
As of December 31, 1999
UNION CENTER NATIONAL BANK
2455 MORRIS AVENUE
UNION, NEW JERSEY 07083
(100% Owned by Center Bancorp, Inc.)
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Center Bancorp, Inc.:
We consent to the incorporation by reference in the Registration Statement No.
33-72176 on Form S-8 and Registration Statement No. 33-72178 of Form S-3 of
Center Bancorp, Inc. of our report dated January 28 2000, relating to the
consolidated statements of condition of Center Bancorp, Inc. as of December 31,
1999 and 1998 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, which report is incorporated by reference in the
December 31, 1999 Annual Report on Form 10-K of Center Bancorp, Inc.
KPMG LLP
Short Hills, New Jersey
March 30 , 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 18,675
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,490
<INVESTMENTS-CARRYING> 183,450
<INVESTMENTS-MARKET> 176,542
<LOANS> 169,089
<ALLOWANCE> (1,423)
<TOTAL-ASSETS> 509,624
<DEPOSITS> 389,255
<SHORT-TERM> 80,752
<LIABILITIES-OTHER> 3,104
<LONG-TERM> 0
0
0
<COMMON> 10,760
<OTHER-SE> 25,753
<TOTAL-LIABILITIES-AND-EQUITY> 509,624
<INTEREST-LOAN> 12,198
<INTEREST-INVEST> 19,442
<INTEREST-OTHER> 452
<INTEREST-TOTAL> 32,092
<INTEREST-DEPOSIT> 10,013
<INTEREST-EXPENSE> 12,801
<INTEREST-INCOME-NET> 19,291
<LOAN-LOSSES> 108
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 13,290
<INCOME-PRETAX> 6,982
<INCOME-PRE-EXTRAORDINARY> 6,982
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,629
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 6.93
<LOANS-NON> 292
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,326
<CHARGE-OFFS> 23
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 1,423
<ALLOWANCE-DOMESTIC> 1,365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 58
</TABLE>
