-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QzHMnTSpZCZHiE9rkLhzoocSwfkX9DXRJHAK0JS5tvWS9tmiM2T/rA01TlaOA86f YU7UQAdCfkSu0AEKnVtzvQ== 0000950110-96-000325.txt : 19960402 0000950110-96-000325.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950110-96-000325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTER BANCORP INC CENTRAL INDEX KEY: 0000712771 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521273725 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11486 FILM NUMBER: 96542749 BUSINESS ADDRESS: STREET 1: 2455 MORRIS AVE CITY: UNION STATE: NJ ZIP: 07083 BUSINESS PHONE: 9086889500 MAIL ADDRESS: STREET 1: 2455 MORRIS AVE CITY: UNION STATE: NJ ZIP: 07083 10-K 1 FORM 10-K 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 (Fee Required) for the fiscal year ended December 31, 1995. __ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (no Fee Required) for the transition period from ___ to ___. Commission File Number 2-81353 CENTER BANCORP, INC. - -------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) New Jersey 52-1273725 (State or other jurisdiction of (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 - -------------------------------------------------------------------------------- (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. Yes [X] or No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 5K 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 March 1, 1996 was approximately $47,513,280. Shares outstanding on March 1, 1996 Common stock no par value - 1,484,790 shares Parts of Form 10-K in which Documents Incorporated by reference document is incorporated Definitive proxy statement dated March 16, 1996, in connection with the 1996 Annual Stockholders Meeting filed with the Commission pursuant to Regulation 14A......................................... Part III Annual Report to Stockholders for the fiscal year ended December 31, 1995........................... Part I and Part II INDEX TO FORM 10-K PART I ITEM 1 BUSINESS .................................................. 1 ITEM 2 PROPERTIES ................................................ 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 ...................... 11 PART II ITEM 5 MARKET FOR THE REGISTRANTS 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 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 CONSENT OF ACCOUNTANTS ................................................. 15 SIGNATURES ............................................................. 16 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 subsidiaries and the term "Parent Company" 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 six offices in Union Township, Union County, New Jersey, one office in Springfield Township, Union County, New Jersey and one office in Berkeley Heights, Union County, New Jersey and currently employs 132 persons. A ninth office, located in Madison, Morris County, New Jersey is scheduled to open in May 1998. The Bank is a full service commercial bank offering a complete range of individual and commercial services. On February 14, 1996, the Parent Company entered into an Agreement and Plan of Merger (the "Agreement") with Lehigh Savings Bank, S.L.A. ("Lehigh") pursuant to which a subsidiary of the Company will be merged with and into Lehigh, with Lehigh being the surviving entity thereof (the "Merger"). Immediately following the Merger, the Company will merge Lehigh with and into the Bank. Pursuant to the terms of the Agreement, shareholders of Lehigh will receive a total of $6.0 million in cash upon consummation of the Merger (which will be accounted for as a purchase). These transactions are subject to several conditions, including the approval of various banking regulators. As of December 31, 1995, Lehigh (which operates [three] banking offices in Union, New Jersey), had total assets, deposits and stockholders' equity of approximately $73.8 million, $67.6 million and $3.9 million, respectively. 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 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 service, wire transfers, night depository and lock box services. The Bank offers a broad range of consumer banking services, including checking accounts, savings accounts, NOW accounts, money market accounts, certificates of deposit, IRA accounts, Automated Teller Machines ("ATM") accessibility using Money Access(TM) 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 29 March 96 Center Bancorp, Inc. Form 10-K Page 1 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 Company 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"). The Parent Company 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 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 Company may borrow from the Bank and prohibits the Parent Company 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". FDICIA imposes significant restrictions on the operations of a depository institution that is not in either of the first two of such categories. A depository institution's capital tier will depend upon the relationship of its capital to various capital measures. A depository institution will be deemed to be "well capitalized" if it significantly exceeds the minimum level required by regulation for each relevant capital measure, "adequately capitalized" if it meets each such measure, "undercapitalized" if it fails to meet any such measure, "significantly undercapitalized" if it is significantly below any such measure and "critically undercapitalized" if it fails to meet any critical capital level set forth in the regulations. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating or is deemed to be in an unsafe or unsound condition or to be engaging in unsafe or unsound practices. 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 29 March 96 Center Bancorp, Inc. Form 10-K Page 2 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 generally prohibits a depository institution from making a capital distribution (including payment of dividends) or paying management fees to any entity that controls the institution if it thereafter would be undercapitalized. If an institution becomes undercapitalized, it will be generally restricted from borrowing from the Federal Reserve, increasing its average total assets, making any acquisitions, establishing any branches or engaging in any new line of business. An undercapitalized institution must submit an acceptable capital restoration plan to the appropriate federal banking agency, which plan must, in the opinion of such agency, be based on realistic assumptions and be "likely to succeed" in restoring the institution's capital. In connection with the approval of such a plan, the holding company of the institution must guarantee that the institution will comply with the plan, subject to a limitation of liability equal to a proportion of the institution's assets. If an undercapitalized institution fails to submit an acceptable plan or fails to implement such a plan, it will be treated as if it is significantly undercapitalized. Under FDICIA, bank regulators are directed to require "significantly undercapitalized" institutions, among other things, to restrict business activities, raise capital through a sale of stock, merge with another institution and/or take any other action which the agency determines would better carry out the purposes of FDICIA. Within 90 days after an institution is determined to be "critically undercapitalized", the appropriate federal banking agency must, in most cases, appoint a receiver or conservator for the institution or take such other action as the agency determines would better achieve the purposes of FDICIA. In general, "critically undercapitalized" institutions will be prohibited from paying principal or interest on their subordinated debt and will be subject to other substantial restrictions. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits. Undercapitalized institutions are prohibited from offering interest rates on deposits significantly higher than prevailing rates. 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 institution 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. 29 March 96 Center Bancorp, Inc. Form 10-K Page 3 FIRREA The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Crime Control Act of 1990 expanded the enforcement powers available to federal banking regulators, including providing greater flexibility to impose enforcement action and increasing the potential civil and criminal penalties. BIF PREMIUMS 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 cover savings and loan association deposits but also covers deposits that are acquired by a BIF-insured institution from a savings and loan association. The Corporation has approximately $295.7 million of deposits at December 31, 1995, with respect to which the Corporation pays insurance premiums. From the first three quarters of 1995, both SAIF-member institutions and BIF-member institutions paid deposit insurance premiums based on a schedule from $0.23 to $0.31 per $100 of deposits. In August, 1995, the FDIC in anticipation of the BIF's imminent achievement of a required 1.25% reserve ratio, reduced the deposit insurance premium rates paid by BIF-insured banks from a range of $0.23 to $0.31 per $100 of deposits to a range of $0.04 to $0.31 per $100 of deposits. The new rate schedule for the BIF was made effective June 1, 1995. The FDIC refunded to BIF-insured institutions the premiums they had paid for the period beginning on June 1, 1995. On November 14, 1995, the FDIC voted to reduce annual assessments for the semi-annual period beginning January 1, 1996 to the legal minimum of $2,000 for BIF-insured institutions, except for the institutions that are not well capitalized and are assigned to the higher supervisory risk categories. 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 Company by the Bank. There are a number of statutory and regulatoy 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 Company 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 11 of the Notes to the Company's Consolidated Financial Statements. D) STATISTICAL INFORMATION (Reference is also made to Item 7 of this Annual Report on Form 10-K) 29 March 96 Center Bancorp, Inc. Form 10-K Page 4 Information regarding interest sensitivity is incorporated by reference to pages 23-24 of the 1995 Annual Report. The gap results noted on pages 23-24 of the 1995 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 next interest income associated with various change in interest rates. Results have reflected that an interest rate increase of 200 basis points and a decline of 50 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 Corporations net income. I. INVESTMENT PORTFOLIO a) For information regarding the carrying value of the investment portfolio, see page 36 of the 1995 Annual Report to Shareholders (the "1995 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, 1995.
Obligations of U.S. Obligations Treasury & of States Government & Political Other Agencies Subdivisions Securities Total (Dollars in thousands) ----------------------------------------------------------------------------------------- Due in 1 year or less Book Value $ 34,770 $ 7,583 $ 345 $ 42,698 Market Value 32,705 7,596 345 40,646 Average Yield 6.31% 5.99% 6.67% 6.26% Due after one year through five years Book Value $ 86,787 $ 28,452 $ 2,550 $ 117,789 Market Value 97,451 28,894 2,588 128,933 Average Yield 6.30% 6.55% 6.73% 6.37% Due after five years through ten years Book Value $ 38,693 $ 6,842 $ 2,977 $ 48,512 Market Value 31,592 6,960 2,980 41,532 Average Yield 7.36% 6.65% 6.78% 28.20% No Maturity Book Value - - 1,096 1,096 Market Value - - 1,096 1,096 Average Yield - - 5.12% 5.12% ---------------------------------------------------------------------------------------- Total Book Value $ 160,250 $ 42,877 $ 5,872 $ 208,999 Market Value 161,748 43,450 5,913 211,111 Average Yield 6.56% 6.46% 6.75% 6.55% =========================================================================================
c) For information regarding securities of a single issuer exceeding 10 percent of stockholders' equity and for other information regarding the Corporation's investment securities portfolio, see Note 3 of the Notes to the Company's Consolidated Financial Statements. II. LOAN PORTFOLIO 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 1995, average total loans comprised 29.4 percent of average interest-earning assets. Growth in lending in recent years has been strong as evidenced by a compound growth rate in average loans since 1993 of 42.8 percent. Average loans amounted to $95.2 million in 1995, $72.8 million in 1994 and $66.7 million 1993. The composition of Center Bancorp's loan portfolio continues to change due to the local economy. 29 March 96 Center Bancorp, Inc. Form 10-K Page 5 Factors such as the economic climate, interest rates, real estate values and employement all contribute to these changes. Loan growth has been generated through marketing and business development efforts. Average commercial loans of $21.3 million rose $2.6 million or 13.9 percent in 1995 as compared with 1994. The Corporation seeks to create growth in commercial lending by offering new products, lowered pricing and 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 procedures to diversify the commercial loan portfolio to limit concentrations in any single industry. The Corporation's and 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, includes 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. The following table sets forth average mortgage loans, which amounted to $69.9 million in 1995, increased $5.2 million or 8.2 percent as compared with a $66.7 million or 38.1 percent rise in 1994. 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, most of these loans and residential mortgage loans have fixed interest rates. Residential loans increased steadily since 1994, but began to slow considerably in the beginning of 1995 as economic interest rates began to rise in 1995. The impact of real estate values has been steadily improving. During the past three years, the Corporation has committed an increasing amount of funds to the development of residential tracts and shopping centers. Construction loans and other temporary mortgage financing increased on average by $1.2 million to $13.6 million in 1995. The growth in construction and other temporary mortgage lending has been generated by increased 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 the loans are typically repaid by cash flows derived from the ongoing project. Loans to individuals include personal loans, student loans, home equity loans, home improvement loans and secondary mortgages, as well as financing for automobiles and other vehicles. Installment loans to individuals averaged $7.0 million in 1995, as compared with $6.2 million in 1994. The growth in loans to individuals, particularly during 1995, was buoyed by increases in automobile loans. Home equity loans, which the Corporation began actively promoting in 1994 and 1995 , 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 $13.2 million in 1995. At the end of 1995, automobile loans and leases amounted to 46.7 percent of total loans to individuals excluding home equity and secondary mortgage financing. Interest rates on home equity loans are generally tied to the prime rate while most other loans to individuals are medium-term (ranging between one-to-five years) and carry fixed interest rates. Unemployment in our general market area has been moderate to high over the last several years and is reflected in our installment loan growth, and recent changes made in product lines to make loans more readily available to consumers who would have otherwise been reluctant to borrow. At December 31, 1995, the Corporation has total unused lending commitments outstanding of $20.5 million, of which approximately 71.2 percent and 0.00 percent were for commercial loans 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. 29 March 96 Center Bancorp, Inc. Form 10-K Page 6 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 case, 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. Real Estate lending policies must include changes implemented by the Federal Deposit Insurance Corporation Improvement Act (FDICIA) more specifically the requirement to monitor and report the aggregate of any loans with loan-to-value ratios in excess of the supervisory limits set forth in the Interagency Guidelines for Real Estate Lending Policies. The Corporation has established their own internal loan-to-value limits for real estate loans. These internal limits should not exceed the following supervisory limits.: Loan Category Loan-to-Value Limit Raw Land 65% Land Development 75% Construction: Commercial, Multifamily*, and other Nonresidential 80% 1 to 4 Family Residential 85% 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 should 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 are to be identified by the bank as exceptions to the supervisory limits and their aggregate amount be reported at least quarterly to the Board of Directors. Non conforming loans should not exceed 100% of capital, with a 30% sublimit for 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 29 March 96 Center Bancorp, Inc. Form 10-K Page 7 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 safe cushion to minimize the risk of loss if the ultimate collection of the loan becomes dependent on the liquidation of security pleded. 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 combined consolidated classified loan report for the Corporation 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. NON-PERFORMING AND PAST DUE LOANS 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 charge-off 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. Occasionally, exceptions are made to this policy if supporting collateral is adequate and the loan is currently in the process of collection. 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. A) Types of Loans The following table presents information regarding the components of the Corporation's loan portfolio on the dates indicated.
Years Ended December 31, -------------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- ------- Commercial $ 21,302 $ 18,674 $ 18,692 $ 20,873 $ 18,128 $ 24,043 Real estate-mortgage 69,954 64,666 40,005 34,078 35,454 36,918 Installment Loan 7,012 6,250 7,378 4,729 5,861 7,817 -------- -------- -------- -------- -------- ------- Total 98,268 89,590 66,075 59,680 59,443 68,778 Less: Unearned discount 698 785 330 163 0 0 Allowance for loan losses 1,073 1,073 943 821 507 487 -------- -------- -------- -------- -------- -------- Net total $ 96,497 $ 87,732 $ 64,802 $ 58,696 $ 58,936 $ 68,291 ======== ======== ======== ======== ======== ========
The reduction in outstanding loans from December 31, 1990 to December 31, 1993 primarily reflects lessened demand for loans and the then current economic conditions. In 1994, demand for the Bank's real estate mortgage products improved substantially, and new products in conjunction with a new 29 March 96 Center Bancorp, Inc. Form 10-K Page 8 marketing program coupled with positive market trends supported the growth in 1995. B) The maturities of commercial loans at December 31, 1995 are listed below. All such loans which are due after one year have predetermined interest rates ( in thousands). 1 Year 1 - 5 (Dollars in thousands) or less Years Total - -------------------------------------------------------------------------- Commercial $ 19,141 $ 2,161 $ 21,302 - -------------------------------------------------------------------------- C) Risk Elements 1. a) There were no loans accounted for on a non-accrual basis at December 31, 1995, 1994, 1993, 1992, or 1991. b) Accruing loans which are contractually past due 90 days or more as to principal or interest payments are as follows: December 31, (Dollars in thousands) 1995 1994 1993 1992 1991 1990 - -------------------------------------------------------------------------------- Commercial $ 0 $ 0 $ 0 $ 0 $ 0 $ 94 Installment 48 0 5 23 6 90 - -------------------------------------------------------------------------------- Net loans $ 48 $ 0 $ 5 $ 23 $ 6 $ 184 - -------------------------------------------------------------------------------- c) There are no loans which are "troubled debt restructurings" for any of the reported periods. Generally speaking, it is the policy of management to charge-off 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. 2. There are no other known "potential problem loans" (as defined by SEC regulations) as of December 31, 1995 that have not been identified and classified. Classified loans consisting of other assets especially mentioned and substandard loans amounted to $942,000 and $204,000, respectively, December 31, 1995. 3. Foreign outstandings - none 4. As of December 31, 1995, $7.7 million of the commercial loan portfolio, 36.1 percent, represents outstanding working capital loans to various real estate developers. All but $3.2 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 is at the maximum amount allowable for Federal income tax purposes and 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 following table 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 in Table II-A (Types of Loans) on page 5 of this report. 29 March 96 Center Bancorp, Inc. Form 10-K Page 9
Loans to Real Estate Loans to Loans to Commercial Total Loans Mortgage Total Loans Installment Total Loans Unallocated (Dollars in thousands) Amount % Amount % Amount % Amount - ------------------------------------------------------------------------------------------------------------------------ 1995 $ 467 21.7 $ 187 71.2 $ 22 7.1 $ 397 1994 $ 399 20.2 $ 185 72.8 $ 55 7.0 $ 434 1993 $ 408 23.4 $ 140 69.4 $ 87 7.2 $ 308 1993 $ 358 27.8 $ 174 65.1 $ 77 7.1 $ 212 1991 $ 91 30.5 $ 88 59.6 $ 43 9.9 $ 285
IV. DEPOSITS The required information regarding average amounts/rates of deposits is presented on page 29 of the 1995 Annual Report. The required information regarding the amount of time certificates of deposits of $100,000 or more is incorporated by reference to page 24 of the 1995 annual report. V. RETURN ON EQUITY AND ASSETS The required information regarding the return on average assets, return on average equity and dividend payout ratio is incorporated by reference to pages 10 and 11 of the 1995 Annual Report. Return on average equity was 1.15 percent, 1.27 percent and 1.18 percent for the years ended December 31, 1995, 1994 and 1993, respectively. The dividend payout ratio was 44.0 percent, 41.0 percent and 43.0 percent for the years ended December 31, 1995, 1994, and 1993, respectively. VI. SHORT-TERM BORROWINGS The required information regarding the amount outstanding of short-term borrowings is incorporated by reference to page 25 of the 1995 Annual Report. ITEM 2-PROPERTIES The Bank's operations are located at six sites in Union Township, one in Springfield Township, one in Berkeley Heights, Union County, New Jersey and a new site in Madison, Morris County, New Jersey to open in May. 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. All but three of the nine locations are owned by the Bank. The lease of the Five Points Branch located at 356 Chestnut Street, Union, New Jersey expires November 30, 1997 and is subject to renewal at the Bank's option. 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. (See the back inside cover of the 1995 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.) ITEM 3-LEGAL PROCEEDINGS Not applicable. 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 1995. 29 March 96 Center Bancorp, Inc. Form 10-K Page 10 ITEM 4 A-EXECUTIVE OFFICERS The following table sets forth the name and age of each executive officer of the Parent Company, the period during which each such person has served as an officer of the Parent Company or the Bank and each such person's business experience (including all positions with the Parent Company and the Bank) for the past five years:
Name and Age Officer Since Business Experience - --------------------------------------------------------------------------------------------------------- John J. Davis 1982 the Parent Company: President & Chief Executive Officer Age - 53 1977 the Bank of the Parent Company and the Bank Eileen J. Torbick 1991 the Parent Company: Senior Vice President & Senior Loan Officer Age - 63 1972 the Bank of the Bank Anthony C. Weagley 1991 the Parent Company: Treasurer of the Parent Company Age - 34 1985 the Bank Vice President & Cashier (September 1991 - Present); Assistant Vice President of the Bank
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 28 of the 1995 Annual Report and is incorporated herein by reference. As of December 31, 1995, there were 629 holders of record of the Parent Company's Common Stock. ITEM 6-SELECTED FINANCIAL DATA The information required by Item 6 of Form 10-K appears on pages 10 - 11 of the 1995 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 13 - 29 of the 1995 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 30 - 49 of the 1995 Annual Report and is incorporated herein by reference. ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 29 March 96 Center Bancorp, Inc. Form 10-K Page 11 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 1996 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 1996 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 1996 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 1996 Annual Meeting of Stockholders. 29 March 96 Center Bancorp, Inc. Form 10-K Page 12 PART IV ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 -K A1. Financial Statements
Page in Annual Report Consolidated Statements of Condition -December 31, 1995, and 1994 30 Consolidated Statements of Income for the years ended December 31, 1995, 31 1994 and 1993 Consolidated Statements of Changes in Stockholders' Equity for the years 32 ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 33 1995, 1994 and 1993 Notes to Consolidated Financial Statements 34 Report of Independent Auditors 49
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 10-K for the year ended December 31, 1992 3.2 Bylaws of the Registrant is incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 10.2 Employment agreement between the Registrant and John J. Davis. 10.3 The Registrant 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 Outside Director 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 29 March 96 Center Bancorp, Inc. Form 10-K Page 13 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 Weagley, dated as of January 1, 1996. 10.8 Agreement and Plan of Merger, by and between the Registrant and Lehigh Savings Bank, S.L.A., dated as of February 14, 1996, as amended. 10.9 Inducement Agreement, dated February 14, 1996 by and between the Registrant and the trustee under a trust agreement applicable to the majority shareholder of Lehigh Savings Bank, S.L.A. 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, 1995 (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 is incorporated by reference to exhibit 22.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 23.1 Consent of KPMG Peat Marwick 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 1995. 29 March 96 Center Bancorp, Inc. Form 10-K Page 14 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, 1996 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 and in the capacities 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 /s/ PAUL LOMAKIN, JR. /s/ STAN R. SOMMER - ------------------------------------- -------------------------------- Paul Lomakin, Jr. Stan R. Sommer Director Director /s/ WILLIAM THOMPSON /s/ ANTHONY C. WEAGLEY - ------------------------------------- -------------------------------- William Thompson Anthony C. Weagley Director Treasurer (Chief Accounting and Financial Officer) EX-10.2 2 EMPLOYMENT AGREEMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of September 1, 1995, by and among UNION CENTER NATIONAL BANK, a bank chartered under the laws of Congress (the "Bank"), CENTER BANCORP INC., a New Jersey corporation that owns all of the capital stock of the Bank (the "Company"), and JOHN J. DAVIS ("Employee"), W I T N E S S E T H : WHEREAS, the Company, the Bank and Davis entered into an employment agreement dated as of August 1, 1992 providing for the Employee's employment by the Company and the Bank (the "Prior Contract"); WHEREAS, subsequent to the execution of the Prior Contract, the Bank and/or the Company have adopted several benefit plans, including the following plans: (i) an Achievement Incentive Plan (as it may be amended from time to time, the "AIP"), (ii)a Benefit Equalization Plan (as it may be amended from time to time, the "BEP"), (iii) a "Savings Equalization Plan" (as it may be amended from time to time, the "SEP"), (iv) a split dollar insurance plan (as it may be amended from time to time, the "SDIP") and (v) a 401(k) Savings Plan (as it may be amended from time to time, the "401(k)Plan" and, together with the AIP, the BEP, the SEP and the SDIP, the "Plans"); WHEREAS, the parties hereto wish to amend the Prior Contract in certain respects to reflect the adoption of the Plans and make certain other changes in the Employee's employment arrangements; WHEREAS, the parties hereto wish to restate the Prior Contract, as so amended, in its entirety; WHEREAS, it is understood that the Company shall remain fully liable hereunder, regardless of the extent to which the Bank is liable hereunder; and WHEREAS, the Bank and the Company desire to employ Employee to devote full time to the business of the Bank and the Company, and Employee desires to be so employed, NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto hereby agree that the Prior Contract is amended and restated in its entirety to provide as follows: 1. Employment. Bank and the Company agree to employ Employee, and Employee agrees to be so employed, in the capacity of President and Chief Executive Officer of the Bank and the Company. Except as otherwise provided in the next sentence of this Section 1, employment shall be for a term of five (5) years, effective as of September 1, 1995 and terminating August 31, 2000 (the "Initial Term"). Notwithstanding the foregoing, this Agreement shall automatically be extended (i) at the end of the Initial Term, for successive one year renewal terms unless, at least three years prior to the commencement of any such renewal term, notice of termination of this Agreement is given by any party hereto to the other parties hereto and (ii) if a "Change in Control Event" (as defined in Section 8(a) hereof) occurs at any time during the Initial Term or during any such renewal term, for a period of five years from the date of such Change in Control Event. It is understood that the effect of the immediately preceding sentence is to assure Employee that in the event that he receives notice of termination of employment pursuant to Section 8(a) hereunder, he will be entitled to severance benefits covering at least three full years of employment in the absence of a Change in Control Event or covering at least five full years of employment in the case of a Change in Control Event. 2. TIME AND EFFORTS. Employee shall diligently and conscientiously devote his full and exclusive time and attention and best efforts in discharging his duties as the President and Chief Executive Officer of the Bank and the Company. 3. BOARD OF DIRECTORS. Employee shall at all times discharge his duties in consultation with and under the supervision of the Boards of Directors of the Bank and the Company. In the performance of his duties, Employee shall make his principal office in such place as the Boards of Directors of the Bank and the Company and Employee may from time to time mutually agree. 4. COMPENSATION. (a) SALARY-INITIAL PERIOD. During the period from September 1, 1995 through December 31, 1995 (the "Initial Period"), Employee shall receive, pursuant to the determination of the Executive Compensation Committee of the Bank's Board of Directors (the "Executive Compensation Committee"), as compensation for his services hereunder, a salary at the rate of one hundred and seventy thousand dollars ($170,000) per annum. This amount shall be paid in eight (8) equal semi-monthly installments on the 15th and 30th day of each month, or as near thereto as practicable. (b) SALARY-SUBSEQUENT YEARS. During each twelve month period following the Initial Period, Employee shall receive, as compensation for his services, his salary set forth for the immediately preceding twelve month period plus such salary increment as shall be determined by the Executive Compensation Committee, with reference to the Bank's salary guide. During each such twelve month period, Employee's salary shall be paid in twenty-four (24) equal semi-monthly installments on the 15th and 30th day of each month, or as near thereto as practicable. (c) BONUSES. Employee shall be entitled to participate in the AIP and shall receive incentive compensation in accordance with the terms of the AIP. In the event that the AIP is terminated, Employee shall receive such incentive compensation as shall be awarded to him by the Executive Compensation Committee. -2- 5. EXPENSES; BENEFITS. (a) REIMBURSEMENT. The Bank and the Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall either (i) present to the Bank from time to time an itemized account of such expenses in any form reasonably required by the Bank and the Company for reimbursement; or (ii) post such expenses to a credit card or other payment means issued to Employee by the Bank and the Company. (b) AUTOMOBILE. The Bank and the Company recognize the Employee's need for an automobile for business purposes. The Bank and the Company, therefore, shall provide (without expense to Employee) the Employee with an automobile, including all related maintenance, repairs, insurance, and other costs, for business and personal use and shall reimburse the Employee for all taxes payable by him as a result of the provision of this benefit to the Employee. The automobile and related costs shall be comparable to those which the Bank provided to the Employee as of August 31, 1995. (c) MISCELLANEOUS BENEFITS. The Bank and the Company shall pay Employee's membership fees and related expenses for membership at the Suburban Golf Club, Union, New Jersey. The Bank and the Company shall also pay for Employee's attendance at industry conventions and meetings, in accordance with existing practices. The Bank and the Company shall also provide Employee with all benefits that are provided to other officers of the Bank and/or the Company. 6. HEALTH INSURANCE; LIFE INSURANCE; DISABILITY INSURANCE; PENSION; AND OTHER PLANS. The Bank and the Company shall provide Employee with life insurance, disability insurance, health insurance, pension benefits and benefits under the BEP, the SEP, the SDIP and the 401(k) Plan to the extent that such benefits are provided to Employee on the date hereof, together with any benefit enhancements that may be added to such plans in the future. The monetary amount of such benefits received by Employee shall be in accordance with the terms and conditions of such plans. 7. VACATION. Employee shall receive annual vacations in conformity with Bank and Company policies on vacations. 8. TERMINATION BY THE BANK WITHOUT CAUSE OR BY THE EMPLOYEE WITH AND WITHOUT GOOD REASON; DEATH. (a) The Bank and the Company may, without "Cause" (as defined herein), terminate this Agreement at any time by giving 30 days' written notice to the Employee. In such event, (i) the Employee, if requested by either the Bank or the Company, shall continue to render services, and regardless of whether such request is made shall be paid his regular compensation and shall continue to participate in all benefit plans of the Company and the Bank, up to the date of termination, (ii) the Employee shall be paid in a single sum, on the date of termination, a severance allowance equal to Employee's regular compensation for the duration of the term of this -3- Agreement, as theretofore renewed pursuant to Section 1 hereof, less all amounts required to be withheld and deducted, (iii) the Employee shall be paid in a single sum, on the date of termination, an amount equal to the largest annual benefit received by Employee under the AIP since the commencement of the AIP (the "Largest Bonus") multiplied by the number of years (rounded to the nearest tenth of a year) remaining in the term of this Agreement, as theretofore renewed pursuant to Section 1 hereof; (iv) the Employee shall be entitled to receive, during the period commencing on the date of termination and ending on the last day of the term (as theretofore renewed pursuant to Section 1 hereof) (the "Extension Period"), the same benefits (or the economic equivalent thereof) that he would have received under the BEP, the SEP, the SDIP, the 401(k) Plan and the other benefit plans described in Section 6 hereof had he remained employed by the Bank during the Extension Period (assuming a salary equal to the salary in effect on the date of termination and an annual incentive under the AIP equal to the Largest Bonus), (v) the Bank and the Company shall fund the obligations set forth in the immediately preceding clause (iv) and (vi) all stock options granted to Employee by the Company shall be exercisable in full, effective as of the date of termination. (b) The Employee shall have the right to resign (and thereby terminate this Agreement) with "Good Reason" (as defined herein) by delivering notice of such resignation to the Bank and the Company at least 30 days prior to the effective date of such resignation. If, prior to the expiration of the term hereof (as theretofore renewed pursuant to Section 1 hereof), the Employee shall resign for Good Reason, the Employee shall be entitled to the same benefits that he would have received pursuant to Section 8(a) hereof had his employment been terminated (on the effective date of such resignation) by the Bank or the Company without Cause. (c) The Employee shall have no obligation to seek substitute employment or otherwise mitigate the Company's obligation to make the payments and provide the benefits described in Sections 8(a) and 8(b) hereof; provided, however, that in the event that (i) Employee's employment terminates prior to a Change in Control Event and (ii) Employee obtains other employment, then the salary and benefits which he actually receives pursuant to such other employment shall be offset against the Employer's obligations hereunder. (d) For purposes of this Agreement, the term "Good Reason" shall mean a resignation by the Employee within 180 days after (i) a materially adverse change in the Employee's duties or title, (ii) a material breach of this Agreement by the Bank or the Company, (iii) the consummation of an acquisition by a third party of a majority of the voting capital stock of the Company or the Bank or substantially all of the assets of the Company or the Bank or (iv) a change in the composition of the Board of Directors of the Company such that the "Continuing Directors" (as defined herein) no longer constitute a majority of the Board (the events referred to in clauses "iii" and "iv" being referred to herein as "Change in Control Events"). For purposes of this Agreement, the term "Continuing Director" shall mean (i) each current member of the Company's Board of Directors and (ii) each person who is hereinafter first nominated to such Board by unanimous vote of the persons who then constitute Continuing Directors. (e) The Employee may, without Good Reason, terminate this Agreement by giving 60 days' written notice to the Bank and the Company. In such event the Employee shall -4- continue to render his services, shall be paid his regular compensation and shall continue to participate in all benefit plans of the Company and the Bank up to the date of termination, but he shall not receive any severance allowance pursuant to this Agreement. (f) In the event that the Employee dies during the term of this Agreement as theretofore renewed pursuant to Section 1 hereof, this Agreement shall terminate as of the date of his death, subject to the obligations of the Company and the Bank that have accrued through the date of death and subject to the terms of all applicable benefit plans (including insurance plans) implemented by the Bank and the Company. 9. TERMINATION WITH CAUSE. (a) The Bank and Company may terminate this Agreement for "Cause" by giving Employee 30 days' written notice. In such event, the Bank and the Company shall pay Employee his compensation, and Employee shall continue to participate in all benefit plans of the Company and the Bank up to the date of termination, but the Bank and the Company shall not be required to provide the Employee with any severance allowance pursuant to this Agreement. For purposes of this Agreement, "Cause" shall consist of the following: (i) disloyal, dishonest or felonious conduct of Employee that materially adversely affects the Bank or the Company; or (ii) termination of the Bank's business due to unprofitability, insolvency, bankruptcy or directive by governmental regulators. Termination for "Cause" shall not be construed to include the takeover of the Bank or the Company, in either a hostile or voluntary manner, by another person, firm or corporation. (b) Notwithstanding the foregoing, in the event that termination is intended as a result of alleged disloyal or dishonest conduct, the Boards of Directors of the Bank and the Company shall give the Employee written notice of the occurrence of (and the facts and circumstances surrounding) the acts allegedly constituting "Cause" and a fair opportunity to present his position to such Boards. Such event shall not constitute "Cause" if, no later than ten (10) business days following Employee's receipt of such notice, the Employee establishes that either the alleged acts did not occur that such acts did not: constitute dishonest or disloyal conduct, that such acts did not materially adversely affect the Company and the Bank or that such acts have been fully corrected and shall not be repeated. 10. NOTICES. All notices required or permitted to be given under this Agreement shall be given by certified mail, return receipt requested, to the parties at the following addresses, or to such other addresses as either may designate in writing to the other party: -5- If to the Bank or the Company: Union Center National Bank 2455 Morris Avenue Union, New Jersey 07083 Attention: Secretary If to Employee: John J. Davis 6 Knollwood Drive Morristown, New Jersey 07960 With a copy to: Peter H. Ehrenberg, Esq. Lowenstein, Sandler, Kohl, Fisher & Boylan A Professional Corporation 65 Livingston Avenue Roseland, New Jersey 07068 11. INDEMNIFICATION; LIABILITY. Employee shall be indemnified by the Bank and the Company to the maximum extent permitted by law (and shall be entitled to receive advances to the maximum extent permitted by law) with respect to all actions and all decisions not to act taken by Employee during the term of this Agreement. The Bank and Company shall be jointly and severally liable under this Agreement with respect to all obligations of either such party hereunder. Any defense available to the Bank that this Agreement is not enforceable against it shall not constitute a defense for the Company. The obligations of this Section 11 shall survive termination of this Agreement with respect to acts or omissions occurring prior to such termination. 12. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey. 13. ENTIRE CONTRACT. This Agreement constitutes the entire understanding and agreement among the Bank, the Company and Employee with regard to all matters set forth herein. There are no other agreements, conditions or representations, oral or written, express or implied, with regard thereto. This Agreement may be amended only in writing, signed by all parties. 14. NON-WAIVER. A delay or failure by any party to exercise a right under this Agreement, or a partial or single exercise of that right, shall not constitute a waiver of that or any other right. -6- 15. HEADINGS. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 16. TAXES. In the event that either the Company's independent public accountants or the Internal Revenue Service determines that any payment, coverage or benefit provided to Employee is subject to the excise tax imposed by Section 4999 (or any successor provision) of the Internal Revenue Code of 1986, as amended ("Section 4999"), the Company and the Bank, within 30 days thereafter, shall pay to Employee, in addition to any other payment, coverage or benefit due and owing hereunder, an amount determined by multiplying the rate of excise tax then imposed by Section 4999 by the amount of the "excess parachute payment" received by Employee (determined without regard to any payments made to Employee pursuant to this Section 16) and dividing the product so obtained by the amount obtained by subtracting the aggregate local, state and Federal income tax rate applicable to the receipt by Employee of the "excess parachute payment" (taking into account the deductibility for Federal income tax purposes of the payment of state and local income taxes thereon) from the amount obtained by subtracting from 1.00 the rate of excise tax then imposed by Section 4999 of the Code, it being the intention of the parties hereto that Employee's net after tax position be identical to that which would have obtained had Sections 28OG and 4999 not been part of the Internal Revenue Code of 1986, as amended. 17. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 18. BINDING EFFECT. The provisions of this Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns. 19. PRIOR CONTRACT. The Prior Contract is hereby superseded in all respects by this Agreement. -7- IN WITNESS WHEREOF, the Bank and the Company each have, by its appropriate officers, signed and affixed its seal and Employee has signed and sealed this Agreement. UNION CENTER NATIONAL BANK By:___________________________________________ Charles P. Woodward, Chairman of the Board CENTER BANCORP INC. By:___________________________________________ Charles P. Woodward, Chairman of the Board ______________________________________________ John J. Davis -8- EX-10.7 3 EMPLOYMENT AGREEMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of January 1, 1996, by and among UNION CENTER NATIONAL BANK, a bank chartered under the laws of Congress (the "Bank"), CENTER BANCORP INC., a New Jersey corporation that owns all of the capital stock of the Bank (the "Company"), and ANTHONY C. WEAGLEY ("Employee"), W I T N E S S E T H : WHEREAS, the Company, the Bank and the Employee desire to enter into an employment agreement providing for the Employee's employment by the Company and the Bank; WHEREAS, the Bank and/or the Company have adopted certain benefit plans, including the following plans: (i) an Achievement Incentive Plan (as it may be amended from time to time, the "AIP"), (ii) a split dollar insurance plan (as it may be amended from time to time, the "SDIP") and (iii) a 401(k) Savings Plan (as it may be amended from time to time, the "401(k)Plan" and, together with the AIP and the SDIP, the "Plans"); WHEREAS, it is understood that the Company shall remain fully liable hereunder, regardless of the extent to which the Bank is liable hereunder; and WHEREAS, the Bank and the Company desire to employ Employee to devote full time to the business of the Bank and the Company, and Employee desires to be so employed, NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto hereby agree as follows: 1. Employment. Bank and the Company agree to employ Employee, and Employee agrees to be so employed, in the capacity of Vice President and Cashier of the Bank and Treasurer of the Company. Except as otherwise provided in the next sentence of this Section 1, employment shall be for a term of three (3) years, effective as of January 1, 1996 and terminating December 31, 1998 (the "Initial Term"). Notwithstanding the foregoing, this Agreement shall automatically be extended (i) at the end of the Initial Term, for successive one year renewal terms unless, at least two years prior to the commencement of any such renewal term, notice of termination of this Agreement is given by any party hereto to the other parties hereto and (ii) if a "Change in Control Event" (as defined in Section 8(a) hereof) occurs at any time during the Initial Term or during any such renewal term, for a period of three years from the date of such Change in Control Event. It is understood that the effect of the immediately preceding sentence is to assure Employee that in the event that he receives notice of termination of employment pursuant to Section 8(a) hereunder, he will be entitled to severance benefits covering at least two full years of employment in the absence of a Change in Control Event or covering at least three full years of employment in the case of a Change in Control Event. 2. TIME AND EFFORTS. Employee shall diligently and conscientiously devote his full and exclusive time and attention and best efforts in discharging his duties as a Vice President and Cashier of the Bank and as Treasurer of the Company. 3. BOARD OF DIRECTORS. Employee shall at all times discharge his duties in consultation with and under the supervision of the President and the Boards of Directors of the Bank and the Company. In the performance of his duties, Employee shall make his principal office in such place as the President of the Bank and the Company and Employee may from time to time mutually agree. 4. COMPENSATION. (a) SALARY-INITIAL PERIOD. During the period from January 1, 1996 through December 31, 1996 (the "Initial Period"), Employee shall receive, pursuant to the determination of the Executive Compensation Committee of the Bank's Board of Directors (the "Executive Compensation Committee"), as compensation for his services hereunder, a salary at the rate of eighty-five thousand dollars ($85,000) per annum. This amount shall be paid in twenty four (24) equal semi-monthly installments on the 15th and 30th day of each month, or as near thereto as practicable. (b) SALARY-SUBSEQUENT YEARS. During each twelve month period following the Initial Period, Employee shall receive, as compensation for his services, his salary set forth for the immediately preceding twelve month period plus such salary increment as shall be determined by the Executive Compensation Committee, with reference to the Bank's salary guide. During each such twelve month period, Employee's salary shall be paid in twenty-four (24) equal semi-monthly installments on the 15th and 30th day of each month, or as near thereto as practicable. (c) BONUSES. Employee shall be entitled to participate in the AIP and shall receive incentive compensation in accordance with the terms of the AIP. In the event that the AIP is terminated, Employee shall receive such incentive compensation as shall be awarded to him by the Executive Compensation Committee. 5. EXPENSES; BENEFITS. (a) REIMBURSEMENT. The Bank and the Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall either (i) present to the Bank from time to time an itemized account of such expenses in any form reasonably required by the Bank and the Company for reimbursement; or (ii) post such expenses to a credit card or other payment means issued to Employee by the Bank and the Company. (b) AUTOMOBILE. The Bank and the Company recognize the Employee's need for an automobile for business purposes. The Bank and the Company, therefore, shall provide -2- (without expense to Employee) the Employee with an automobile, including all related maintenance, repairs, insurance, and other costs, for business and personal use and shall reimburse the Employee for all taxes payable by him as a result of the provision of this benefit to the Employee. The automobile shall be the automobile provided to the Employee in December 1995 and the related costs shall be comparable to those which the Bank provided to the Employee as of December 31, 1995. (c) MISCELLANEOUS BENEFITS. The Bank and the Company shall provide Employee with all benefits that are generally provided to officers of the Bank and/or the Company, other than the President. 6. HEALTH INSURANCE; LIFE INSURANCE; DISABILITY INSURANCE; PENSION; AND OTHER PLANS. The Bank and the Company shall provide Employee with life insurance, disability insurance, health insurance, pension benefits and benefits under the SDIP and the 401(k) Plan to the extent that such benefits are provided to Employee on the date hereof, together with any benefit enhancements that may be added to such plans in the future. The monetary amount of such benefits received by Employee shall be in accordance with the terms and conditions of such plans. 7. VACATION. Employee shall receive annual vacations in conformity with Bank and Company policies on vacations. 8. TERMINATION BY THE BANK WITHOUT CAUSE OR BY THE EMPLOYEE WITH AND WITHOUT GOOD REASON; DEATH. (a) The Bank and the Company may, without "Cause" (as defined herein), terminate this Agreement at any time by giving 30 days' written notice to the Employee. In such event, (i) the Employee, if requested by either the Bank or the Company, shall continue to render services, and regardless of whether such request is made shall be paid his regular compensation and shall continue to participate in all benefit plans of the Company and the Bank, up to the date of termination, (ii) the Employee shall be paid in a single sum, on the date of termination, a severance allowance equal to Employee's regular compensation for the duration of the term of this Agreement, as theretofore renewed pursuant to Section 1 hereof, less all amounts required to be withheld and deducted, (iii) the Employee shall be paid in a single sum, on the date of termination, an amount equal to the largest annual benefit received by Employee under the AIP since the commencement of the AIP (the "Largest Bonus") multiplied by the number of years (rounded to the nearest tenth of a year) remaining in the term of this Agreement, as theretofore renewed pursuant to Section 1 hereof; (iv) the Employee shall be entitled to receive, during the period commencing on the date of termination and ending on the last day of the term (as theretofore renewed pursuant to Section 1 hereof) (the "Extension Period"), the same benefits (or the economic equivalent thereof) that he would have received under the SDIP, the 401(k) Plan and the other benefit plans described in Section 6 hereof had he remained employed by the Bank during the Extension Period (assuming a salary equal to the salary in effect on the date of termination and an annual incentive under the AIP equal to the Largest Bonus), (v) the Bank and the Company shall fund the obligations set forth in the immediately preceding clause (iv) and (vi) -3- all stock options granted to Employee by the Company shall be exercisable in full, effective as of the date of termination. (b) The Employee shall have the right to resign (and thereby terminate this Agreement) with "Good Reason" (as defined herein) by delivering notice of such resignation to the Bank and the Company at least 30 days prior to the effective date of such resignation. If, prior to the expiration of the term hereof (as theretofore renewed pursuant to Section 1 hereof), the Employee shall resign for Good Reason, the Employee shall be entitled to the same benefits that he would have received pursuant to Section 8(a) hereof had his employment been terminated (on the effective date of such resignation) by the Bank or the Company without Cause. (c) The Employee shall have no obligation to seek substitute employment or otherwise mitigate the Company's obligation to make the payments and provide the benefits described in Sections 8(a) and 8(b) hereof; provided, however, that in the event that (i) Employee's employment terminates prior to a Change in Control Event and (ii) Employee obtains other employment, then the salary and benefits which he actually receives pursuant to such other employment shall be offset against the Employer's obligations hereunder. (d) For purposes of this Agreement, the term "Good Reason" shall mean a resignation by the Employee within 180 days after (i) a materially adverse change in the Employee's duties or title, (ii) a material breach of this Agreement by the Bank or the Company, (iii) the consummation of an acquisition by a third party of a majority of the voting capital stock of the Company or the Bank or substantially all of the assets of the Company or the Bank or (iv) a change in the composition of the Board of Directors of the Company such that the "Continuing Directors" (as defined herein) no longer constitute a majority of the Board (the events referred to in clauses "iii" and "iv" being referred to herein as "Change in Control Events"). For purposes of this Agreement, the term "Continuing Director" shall mean (i) each current member of the Company's Board of Directors and (ii) each person who is hereinafter first nominated to such Board by unanimous vote of the persons who then constitute Continuing Directors. (e) The Employee may, without Good Reason, terminate this Agreement by giving 60 days' written notice to the Bank and the Company. In such event the Employee shall continue to render his services, shall be paid his regular compensation and shall continue to participate in all benefit plans of the Company and the Bank up to the date of termination, but he shall not receive any severance allowance pursuant to this Agreement. (f) In the event that the Employee dies during the term of this Agreement as theretofore renewed pursuant to Section 1 hereof, this Agreement shall terminate as of the date of his death, subject to the obligations of the Company and the Bank that have accrued through the date of death and subject to the terms of all applicable benefit plans (including insurance plans) implemented by the Bank and the Company. -4- 9. TERMINATION WITH CAUSE. (a) The Bank and Company may terminate this Agreement for "Cause" by giving Employee 30 days' written notice. In such event, the Bank and the Company shall pay Employee his compensation, and Employee shall continue to participate in all benefit plans of the Company and the Bank up to the date of termination, but the Bank and the Company shall not be required to provide the Employee with any severance allowance pursuant to this Agreement. For purposes of this Agreement, "Cause" shall consist of the following: (i) disloyal, dishonest or felonious conduct of Employee that materially adversely affects the Bank or the Company; or (ii) termination of the Bank's business due to unprofitability, insolvency, bankruptcy or directive by governmental regulators. Termination for "Cause" shall not be construed to include the takeover of the Bank or the Company, in either a hostile or voluntary manner, by another person, firm or corporation. (b) Notwithstanding the foregoing, in the event that termination is intended as a result of alleged disloyal or dishonest conduct, the Boards of Directors of the Bank and the Company shall give the Employee written notice of the occurrence of (and the facts and circumstances surrounding) the acts allegedly constituting "Cause" and a fair opportunity to present his position to such Boards. Such event shall not constitute "Cause" if, no later than ten (10) business days following Employee's receipt of such notice, the Employee establishes that either the alleged acts did not occur that such acts did not: constitute dishonest or disloyal conduct, that such acts did not materially adversely affect the Company and the Bank or that such acts have been fully corrected and shall not be repeated. 10. NOTICES. All notices required or permitted to be given under this Agreement shall be given by certified mail, return receipt requested, to the parties at the following addresses, or to such other addresses as either may designate in writing to the other party: -5- If to the Bank or the Company: Union Center National Bank 2455 Morris Avenue Union, New Jersey 07083 Attention: President If to Employee: Anthony C. Weagley 1875 Cider Mill Road Union, New Jersey 07083 11. INDEMNIFICATION; LIABILITY. Employee shall be indemnified by the Bank and the Company to the maximum extent permitted by law (and shall be entitled to receive advances to the maximum extent permitted by law) with respect to all actions and all decisions not to act taken by Employee during the term of this Agreement. The Bank and Company shall be jointly and severally liable under this Agreement with respect to all obligations of either such party hereunder. Any defense available to the Bank that this Agreement is not enforceable against it shall not constitute a defense for the Company. The obligations of this Section 11 shall survive termination of this Agreement with respect to acts or omissions occurring prior to such termination. 12. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of New Jersey. 13. ENTIRE CONTRACT. This Agreement constitutes the entire understanding and agreement among the Bank, the Company and Employee with regard to all matters set forth herein. There are no other agreements, conditions or representations, oral or written, express or implied, with regard thereto. This Agreement may be amended only in writing, signed by all parties. 14. NON-WAIVER. A delay or failure by any party to exercise a right under this Agreement, or a partial or single exercise of that right, shall not constitute a waiver of that or any other right. 15. HEADINGS. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 16. TAXES. In the event that either the Company's independent public accountants or the Internal Revenue Service determines that any payment, coverage or benefit provided to Employee is subject to the excise tax imposed by Section 4999 (or any successor provision) of the Internal Revenue Code of 1986, as amended ("Section 4999"), the Company and the Bank, within 30 days thereafter, shall pay to Employee, in addition to any other payment, -6- coverage or benefit due and owing hereunder, an amount determined by multiplying the rate of excise tax then imposed by Section 4999 by the amount of the "excess parachute payment" received by Employee (determined without regard to any payments made to Employee pursuant to this Section 16) and dividing the product so obtained by the amount obtained by subtracting the aggregate local, state and Federal income tax rate applicable to the receipt by Employee of the "excess parachute payment" (taking into account the deductability for Federal income tax purposes of the payment of state and local income taxes thereon) from the amount obtained by subtracting from 1.00 the rate of excise tax then imposed by Section 4999 of the Code, it being the intention of the parties hereto that Employee's net after tax position be identical to that which would have obtained had Sections 28OG and 4999 not been part of the Internal Revenue Code of 1986, as amended. 17. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 18. BINDING EFFECT. The provisions of this Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns. IN WITNESS WHEREOF, the Bank and the Company each have, by its appropriate officers, signed and affixed its seal and Employee has signed and sealed this Agreement. UNION CENTER NATIONAL BANK By:__________________________________ John J. Davis, President CENTER BANCORP INC. By:__________________________________ John J. Davis, President _____________________________________ Anthony C. Weagley -7- EX-10.9 4 INDUCEMENT AGREEMENT INDUCEMENT AGREEMENT INDUCEMENT AGREEMENT, dated February 14, 1996, by and between Horace J. DePodwin, solely in his capacity as trustee (the "Trustee") under the Trust Agreement, dated as of November 9, 1992 (the "Trust Agreement"), by and among Lehigh Savings Bank, S.L.A., a New Jersey chartered capital stock savings and loan association (the "Association"), David Margolis (the "Shareholder"), Mildred Margolis and the Office of Thrift Supervision ("OTS") and Center Bancorp, Inc., a New Jersey corporation (the "Company"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Trustee is the trustee under the Trust Agreement; and WHEREAS, pursuant to the Trust Agreement, the Trustee is holding in trust for the benefit of the Shareholder 392,489 shares (together with all other shares of capital stock of the Association, if any, which the Trustee may hold pursuant to the Trust Agreement as a result of any stock split, stock dividend, reclassification, recapitalization or otherwise of the capital stock of the Association, the "Trust Shares") of the Common Stock, par value $10 per share (the "Common Stock"), of the Association; and WHEREAS, the Association and the Company have negotiated the terms and conditions of a proposed Agreement and Plan of Merger (the "Merger Agreement") pursuant to which, among other things, a subsidiary of the Company will merge with and into the Association and the shareholders of the Association, including the Trustee on behalf of the Shareholder, will receive the Per Share Consideration specified in the Merger Agreement for each outstanding share of Common Stock (except in certain circumstances); and WHEREAS, as a condition to entering into the Merger Agreement and performing its obligations thereunder, the Company has required that the Trustee make certain representations and warranties and agree to certain terms and conditions as set forth herein; and WHEREAS, in order to induce the Company to enter into the Merger Agreement and perform its obligations thereunder, the Trustee has agreed to make the representations and warranties and to agree to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises, and intending to be legally bound, the parties hereto agree as follows: ARTICLE I VOTING OF TRUST SHARES; NO TRANSFERS Section 1.1. Voting of Trust Shares. The Trustee hereby irrevocably agrees to vote the Trust Shares in favor of the Merger, subject only to Section 1.3 hereof. In furtherance of the foregoing and not in limitation thereof, if deemed reasonably necessary by either the Association or the Company, the Trustee shall (i) cause the Trust Shares to be present in person or by proxy at any meeting of the shareholders of the Association (including any adjournments or postponements thereof) called to consider and vote upon the Merger and the transactions contemplated by the Merger Agreement and shall vote the Trust Shares or cause the Trust Shares to be voted in favor thereof at such meeting or (ii) execute one or more written consents approving the Merger and the other transactions contemplated by the Merger Agreement. Section 1.2. Prohibition on Transfers; Restrictive Legend. (a) Subject to Section 1.3, without the prior written consent of the Company, during the term of this Agreement the Trustee shall not transfer, sell, assign, pledge, hypothecate, give, create a security interest in or lien on, place in trust (voting or otherwise), transfer by operation of law (other than by way of a merger or consolidation of the Association), grant a proxy with respect to or in any other way encumber or dispose of, directly or indirectly and whether or not voluntarily (each, a "Transfer"), any of the Trust Shares and shall not vote the Trust Shares on any matter in a manner that is inconsistent with the purposes of this Agreement. (b) The Trustee shall cause the Association not to reflect on its books any Transfer of Trust Shares to any person except in accordance with this Agreement. Promptly following the execution and delivery of this Agreement, the Trustee shall exchange the certificates representing the Trust Shares for certificates of like tenor which shall be stamped or endorsed with a legend in substantially the following form: TRANSFERS AND VOTING IN RESPECT OF THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF AN AGREEMENT DATED FEBRUARY 14, 1996 BY AND BETWEEN CENTER BANCORP, INC. AND HORACE J. DEPODWIN, AS TRUSTEE,, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE ASSOCIATION AND MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO THE ASSOCIATION. Section 1.3. OTS Approval. Notwithstanding anything to the contrary contained in this Agreement, the provisions of Article I hereof shall be of no further force and effect in the event that the OTS does not approve the Merger and the other transactions contemplated by the Merger Agreement (including this Agreement). -2- ARTICLE II Representations and Warranties of the Trustee The Trustee hereby represents and warrants to the Company as follows: Section 2.1. Capacity; Authorization. The Trustee is the trustee under the Trust Agreement and as such has the authority and the capacity to execute and deliver this Agreement and to perform his obligations hereunder. The Trustee is under no impairment or other disability, legal, physical, mental or otherwise, whether or not arising out of the Trust Agreement, that would preclude or limit the ability of the Trustee to perform his obligations hereunder. The Trustee has full power and authority under the Trust Agreement to execute and deliver this Agreement and to perform his obligations hereunder, all of which have been duly authorized by all requisite action. The Trustee has the power and authority to bind the Shareholder to the terms hereof by his execution and delivery of this Agreement. This Agreement as been duly authorized, executed and delivered by the Trustee and constitutes a valid and binding agreement of the Trustee, enforceable against the Trustee in accordance with its terms. Section 2.2. Non-contravention. Neither the execution and delivery of this Agreement by the Trustee nor the performance by the Trustee of his obligations hereunder will (i) violate or result in a breach (with or without the lapse of time, the giving of notice or both) of or constitute a default under (A) any contract, agreement, commitment, indenture, mortgage, lease, pledge, note, license, permit or other instrument or obligation or (B) any judgment, order, decree, law, rule or regulation or other restriction of any governmental authority, in each case to which the Trustee is a party or by which he or the Trust Shares are bound or to which the Trust Shares are subject, or (iii) result in the creation or imposition of any lien, claim, charge, mortgage, pledge, security interest, equity, restriction or other encumbrance (collectively, "Encumbrances") on the Trust Shares. Section 2.3. No Consents. Other than the receipt of nonapproval of the OTS pursuant to the Trust Agreement, no notice to, filing with, or authorization, registration, consent or approval of any governmental authority or other person is necessary for the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby by the Trustee. Section 2.4. Trust Agreement; Status of Trustee. A true and complete copy of the Trust Agreement, and any amendments, supplements and modifications thereto, is attached hereto as Exhibit A. The Trust Agreement (as so amended, modified or supplemented) remains in full force and effect. No breach or default or event which, with the giving of notice, the lapse of time, or both would constitute a breach or default under the Trust Agreement has occurred and is continuing. Neither the Trustee nor, to the Trustee's best knowledge, the Shareholder has taken any actions for the purpose or with the intent of (i) further amending, modifying or supplementing the Trust Agreement, (ii) Transferring the Trust Shares (except as contemplated by this Agreement and the Merger Agreement), (iii) causing the Trustee to resign as trustee under the -3- Trust Agreement, or (iv) removing or seeking the removal of the Trustee as trustee under the Trust Agreement, and no such action is, to the Trustee's best knowledge, contemplated. Section 2.5. Ownership of the Trust Shares. The Trustee owns the Trust Shares of record for the benefit of the Shareholder, free and clear of any Encumbrances, other than Encumbrances created by the Trust Agreement. Other than the Trust Agreement, there are no voting trust arrangements, shareholder agreements or other agreements (i) granting any option, warrant or right of first refusal with respect to the Trust Shares to any person, (ii) restricting the right of the Trustee to sell the Trust Shares to the Company pursuant to the Merger Agreement, or (iii) restricting any other right of the Trustee with respect to the Trust Shares. Subject to the receipt of nonapproval of the OTS pursuant to the Trust Agreement, the Trustee has the absolute and unrestricted right, power and capacity to sell, assign and transfer the Trust Shares to the Company pursuant to the terms of the Merger Agreement, free and clear of any Encumbrances. Upon delivery to the Company of the Certificates representing the Trust Shares at Closing in exchange for the Per Share Consideration to be paid by the Company at the Closing, the Company will acquire good, valid and marketable title to the Trust Shares, free and clear of any Encumbrances. Section 2.6. Brokers. No person is or will be entitled to a broker's, finder's, investment banker's, financial adviser's or similar fee from the Trustee in connection with this Agreement or the Merger Agreement or any of the transactions contemplated hereby or thereby. Section 2.7. Full Disclosure. No representation or warranty made by the Trustee in this Agreement or any certificate delivered, or to be delivered, by or on behalf of the Trustee pursuant hereto contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. There is no fact or circumstance that the Trustee has not disclosed to the Company in writing that the Trustee presently believes could reasonably be expected to have a material adverse effect on the ability of the Trustee to perform his obligations under this Agreement. ARTICLE III COVENANTS OF THE TRUSTEE Section 3.1. Certain Affirmative Covenants of the Trustee. From and after the date hereof until the earlier of the termination of the Merger Agreement or the Effective Time, the Trustee shall (i) use his best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Merger Agreement, including but not limited to, obtaining consents, approvals and the receipt of nonapproval of the OTS and all other governmental entities and third parties necessary to the consummation of the transactions contemplated by this Agreement, (ii) provide the Company with true and complete copies of all correspondence and memoranda between the Trustee and the OTS, (iii) use his best efforts to include the Company or its designated representative in all conversations between the Trustee and the OTS and (iv) promptly inform the -4- Company in writing of any material breach of or change in the representations and warranties contained in Article II hereof. Section 3.2. Certain Negative Covenants of the Trustee. From and after the date hereof until the earlier of the termination of the Merger Agreement or the Effective Time, the Trustee shall not and shall use his best efforts to cause the Shareholder not to (i) enter into any contract, agreement or commitment or take any other action which, if entered into or taken prior to the date of this Agreement, would cause any representation or warranty of the Trustee to be untrue, (ii) incur, create or suffer to exist any Encumbrance on the Trust Shares, other than Encumbrances existing under the Trust Agreement as of the date hereof and Encumbrances created hereby, (iii) amend, modify or supplement the Trust Agreement or (iv) take or omit to be taken any action which could reasonably be expected to delay, hinder or make impossible or illegal the transactions contemplated by this Agreement and the Merger Agreement. Section 3.3. No Acquisition Proposals. The Trustee shall not, directly or indirectly, and shall instruct and otherwise use his best efforts to cause the Shareholder and their respective agents, advisors and other representatives not to, directly or indirectly, (i) encourage, solicit or initiate any proposals or offers from any person relating to any acquisition or purchase of all or a material amount of the assets of, or any securities of, or any merger, consolidation or business combination with, the Association (such transactions are referred to herein as "Acquisition Transactions") or (ii) participate in any discussions or negotiations regarding, or furnish to any other person any information with respect to, an Acquisition Transaction. The Trustee shall promptly notify the Company orally and in writing of any proposal or offer regarding an Acquisition Transaction, any inquiries with respect thereto and any request for information relating thereto. Such written notification shall include the identify of the entity making such inquiry or Acquisition Transaction proposal or offer or request and such other information with respect thereto as is reasonably necessary to apprise the Company of the material terms of such Acquisition Transaction proposal or offer or request and all other material information relating thereto. Section 3.4. Affirmation of Representations and Warranties; Compliance With Terms. At the Closing, the Trustee will deliver to the Company a certificate certifying that the representation and warranties of the Trustee contained herein are true and correct in all respects as of the Closing and that the Trustee has duly performed or complied with all of the covenants, obligations and conditions to be performed or complied with by him under the terms of this Agreement on or prior to or at Closing. Section 3.5. Delivery of Certificates. At the Closing, the Trustee shall deliver to the Company the Certificates representing the Trust Shares properly endorsed or otherwise in proper form for surrender, with all signatures guaranteed. Section 3.6. Execution of General Release. Prior to or at the Closing, the Trustee shall deliver to the Company a general release, in form and substance satisfactory to the Company, executed by each of the Trustee and the Shareholder, in favor of the Association and certain related parties and containing such other terms as the Company may reasonably require. -5- Section 3.7. Further Assurances. In the event that at any time after Closing any further action is necessary to carry out the purposes of this Agreement, the Trustee shall, at the Company's cost, take all such action without any further consideration therefor. ARTICLE IV TERMINATION Section 4.1. Termination. This Agreement may be terminated as follows: (a) by mutual consent of the parties hereto; (b) by the Company if the Trustee shall breach in any material respect any of his representations, warranties, covenants, obligations or agreements contained in this Agreement; and (c) by any party hereto in the event that the Merger Agreement is terminated prior to Closing. Section 4.2. Effect of Termination. If this Agreement is terminated pursuant to Section 4.1 hereof, all rights and obligations of the parties hereunder shall terminate and no party shall have any liability to any other party, except for obligations of the parties hereto in Sections 4.3 and 5.2, which shall survive the termination of this Agreement, and except nothing herein will relieve any party from liability for any breach of any representation, warranty, covenant, obligation or agreement contained herein prior to such termination. Section 4.3. Limitation of Liability; Equitable Remedies. The Company acknowledges that the Trustee has entered into this Agreement as trustee under the Trust Agreement and not in his personal capacity. Accordingly, the Trustee shall not be personally liable to the Company, or any of its affiliates for any costs, damages, losses, liabilities or obligations (collectively, "Damages") suffered by any of them as a result of a breach or violation by the Trustee of the terms hereof, unless caused by the gross negligence or willful misconduct of the Trustee. The Trustee acknowledges that any breach by the Trustee of the terms hereof would result in immediate and irreparable harm to the Company for which an adequate remedy would not be available at law. Accordingly, in the event of any breach, or threatened breach, of the provisions of this Agreement, the Company shall be entitled to an order of specific performance or other injunctive relief in addition to any other rights and remedies to which the Company may be entitled, whether at law or in equity, and the Trustee hereby consents to the entry of an order providing such relief. The Company shall not be required to post any bond or other security in connection with any such action for specific performance or other injunctive relief. The provisions of this Section 4.3 shall survive the expiration or termination of this Agreement. -6- ARTICLE V MISCELLANEOUS Section 5.1. Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be delivered personally, by facsimile or sent by certified, registered or express air mail, postage prepaid, and shall be deemed given when so delivered personally, or by facsimile, or if mailed, five days after the date of mailing, as follows: If to the Trustee: c/o Economic Studies, Inc. One Gateway Center Suite 420 Newark, New Jersey 07102-4082 Telephone: (201) 621-0180 Facsimile: (201) 621-0182 With a copy to: Pitney, Hardin, Kipp & Szuch 200 Campus Drive Florham Park, New Jersey 07932-0950 Telephone: (201) 966-6300 Facsimile: (201) 966-1550 Attention: Joseph Lunin, Esq. If to the Company: 2455 Morris Avenue Union, New Jersey 07083 Telephone: (908) 688-9500 Facsimile: (908) 688-3043 Attention: Jack Davis With a copy to: Lowenstein, Sandler, Kohl, Fisher & Boylan 65 Livingston Avenue Roseland, New Jersey 07068 Telephone: (201) 992-8700 Facsimile: (201) 992-5820 Attention: Peter H. Ehrenberg, Esq. or to such other address as any party hereto shall notify the other parties hereto (as provided above) from time to time. Section 5.2. Expenses. Regardless of whether the transactions provided for in this Agreement are consummated, except as otherwise provided herein, each party hereto shall pay his own expenses incident to this Agreement and the transactions contemplated herein. -7- Section 5.3. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the United States and, to the extent not inconsistent therewith, the internal laws of the State of New Jersey, without reference to the choice of law principles thereof. Section 5.4. Assignment; Successors and Assigns; No Third Party Rights. This Agreement may not be assigned by operation of law or otherwise, and any attempted assignment shall be null and void; provided, however, that the provisions of this sentence shall not prohibit the appointment of a successor trustee under the Trust Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, assigns and legal representatives (including, but not limited to, any successor trustee under the Trust Agreement). This Agreement shall be for the sole benefit of the parties to this Agreement and their respective heirs, successors, assigns and legal representatives and is not intended, nor shall be construed, to give any person, other than the parties hereto and their respective heirs, successors, assigns and legal representatives, any legal or equitable right, remedy or claim hereunder. Section 5.5. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original agreement, but all of which together shall constitute one and the same instrument. Section 5.6. Titles and Headings. The titles and headings in this Agreement are for reference purposes only, and shall not in any way affect the meaning or interpretation of this Agreement. Section 5.7. Entire Agreement. This Agreement, including the Exhibits attached hereto, constitutes the entire agreement among the parties with respect to the matters covered hereby and supersedes all previous written, oral or implied understandings among them with respect to such matters. Section 5.8. Amendment and Modification. This Agreement may only be amended or modified in writing signed by the party against whom enforcement of such amendment or modification is sought. Section 5.9. Waiver. Any of the terms or conditions of this Agreement may be waived at any time by the party or parties entitled to the benefit thereof, but only by a writing signed by the party or parties waiving such terms or conditions. Section 5.10. Severability. The invalidity of any portion hereof shall not affect the validity, force or effect of the remaining portions hereof. If it is ever held that any restriction hereunder is too broad to permit enforcement of such restriction to his fullest extent, such restriction shall be enforced to the maximum extent permitted by law. Section 5.11. No Strict Construction. Each of the parties hereto acknowledges that this Agreement has been prepared jointly by the parties hereto, and shall not be strictly construed against any party. -8- Section 5.12. Capitalized Terms. Capitalized terms used herein shall have the respective meanings ascribed thereto in the Merger Agreement unless otherwise defined herein. [Remainder of page intentionally left blank] -9- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. __________________________________ Horace J. DePodwin, as Trustee CENTER BANCORP, INC. By: ______________________________ Name: Title: -10- EX-10.8 5 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER by and between CENTER BANCORP, INC. and LEHIGH SAVINGS BANK, S.L.A. dated as of February 14, 1996 INDEX TO DEFINITIONS Act.................................................................Section 1.1 Affected Loans......................................................Section 5.7 Agreement..........................................................Introduction Association........................................................Introduction Association Disclosure Schedule.....................................Article III Association Financial Statements..................................Section 3.4.1 Association Statement of Condition Date...........................Section 3.4.3 Bank................................................................Section 4.7 Acquisition Transactions............................................Section 5.1 Agreement..........................................................Introduction Branch Property....................................................Section 3.24 CERCLA.............................................................Section 3.24 Certificate.........................................................Section 1.5 Closing.............................................................Section 1.4 Code..............................................................Section 3.8.2 Collateral Shares.................................................Section 2.1.1 Commissioner........................................................Section 1.2 Common Stock......................................................Section 2.1.1 Company............................................................Introduction Company Disclosure Schedule..........................................Article IV Confidentiality Agreement...........................................Section 5.4 Consents..........................................................Section 6.1.2 Constituent Banks...................................................Section 5.6 Constituent Entities................................................Section 1.2 Department........................................................Section 3.3.2 DEPE..............................................................Section 3.3.2 Effective Date......................................................Section 1.2 Environmental Law..................................................Section 3.20 Escrow Account......................................................Section 2.3 Escrow Agent........................................................Section 2.3 Excess TILA Costs...................................................Section 2.3 FDIC..............................................................Section 3.1.1 GAAP..............................................................Section 3.4.1 Hazardous Substance................................................Section 3.20 Inducement Agreement...............................................Introduction IRS...............................................................Section 3.8.1 ISRA...............................................................Section 3.20 Legal Proceedings...................................................Section 3.7 Material Adverse Effect...........................................Section 3.3.2 Merger.............................................................Introduction Merger Sub.........................................................Introduction OCC...............................................................Section 4.2.2 OTS................................................................Introduction -2- PCBs................................................................Section 3.20 Post-Closing Merger..................................................Section 5.6 Qualifying TILA Costs................................................Section 2.3 RCRA................................................................Section 3.20 Real Property.......................................................Section 3.20 Returns............................................................Section 3.8.1 SAIF...............................................................Section 3.1.1 Settlement Agreement................................................Section 3.14 Side Letter.........................................................Section 5.17 Stockholder.........................................................Introduction Surviving Bank.......................................................Section 5.6 Surviving Entity.....................................................Section 1.3 TILA................................................................Section 5.16 TILA Costs........................................................Section 6.3.10 TILA Violation......................................................Section 5.16 Trust Account Shares...............................................Section 2.1.1 Trust Agreement.....................................................Introduction Trustee.............................................................Introduction -3- AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER ("Agreement"), dated as of February 14, 1996, is made by and between Center Bancorp, Inc., a New Jersey corporation (the "Company"), and Lehigh Savings Bank, S.L.A., a New Jersey chartered capital stock savings and loan association (the "Association"). WHEREAS, the respective Boards of Directors of the Company and the Association, by the requisite vote required under applicable law, have each determined that it is in the best interests of the Company and the Association and their respective stockholders for the Company to acquire the Association by (i) organizing an interim New Jersey-chartered capital stock savings and loan association (the "Merger Sub") and (ii) merging Merger Sub with and into the Association upon the terms and subject to the conditions set forth herein (the "Merger"); WHEREAS, the respective Boards of Directors of the Company and the Association, by the requisite vote required under applicable law, have each approved the Merger upon the terms and subject to the conditions set forth herein; and WHEREAS, the trustee (the "Trustee") under the Trust Agreement, dated as of November 9, 1992 (the "Trust Agreement"), by and among David Margolis (the "Stockholder"), Mildred Margolis, the Trustee and the Office of Thrift Supervision (the "OTS") has entered into an Inducement Agreement, dated of even date herewith (the "Inducement Agreement"), pursuant to which, among other things, the Trustee has agreed to vote the shares of the Association's common stock held by him in favor of the Merger, subject to receipt of notice of non-disapproval from the OTS; NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I-THE MERGER 1.1. Merger. Subject to the terms and conditions of this Agreement, on the Effective Date (as defined in Section 1.2), the Merger Sub shall be merged with and into the Association and the separate legal existence of Merger Sub shall thereupon cease in accordance with the applicable provisions of the New Jersey Savings and Loan Act (the "Act"). The Merger shall be treated as a taxable purchase of the Common Stock of the Association by the Company for federal and state income tax purposes. 1.2. Effective Date. As soon as practicable following fulfillment or waiver of the conditions specified in Article VI, and provided that this Agreement has not been terminated or abandoned pursuant to Section 7.1, Merger Sub and the Association (the "Constituent Entities") shall jointly certify to the New Jersey Commissioner of Banking (the "Commissioner") that they -4- have complied with all of the requirements of the Act. The Merger shall become effective on the date such certification is approved by the Commissioner (the "Effective Date"). 1.3. Effect of Merger. The Merger shall have the effects specified in the Act. Without limiting the generality of the foregoing, the corporate existence of each of Merger Sub and the Association shall be merged into each other and all of their respective rights, privileges and franchises, and their respective right, title and interest in and to all property of whatever kind, whether real, personal or mixed, and things in action and every right, privilege, interest or asset of value or benefit then existing shall be vested in the Association as the surviving entity of the Merger (sometimes hereinafter referred to as the "Surviving Entity"). 1.4. Consummation of Merger. The closing of the Merger (the "Closing") shall take place (a) at the offices of Lowenstein, Sandler, Kohl, Fisher & Boylan, 65 Livingston Avenue, Roseland, New Jersey 07068 five business days after notification that all of the conditions set forth in Article VI have been satisfied or duly waived or (b) at such other time and place and on such other date as the Company and the Association may agree. 1.5. Certificate of Incorporation and By-laws. The Certificate of Incorporation and By-Laws of Merger Sub in effect immediately prior to the Effective Date shall be the Certificate of Incorporation and By-Laws of the Surviving Entity, until duly amended in accordance with their terms and the Act. 1.6 Directors and Officers. The directors and officers of Merger Sub immediately prior to the Effective Date shall be the directors and officers, respectively, of the Surviving Entity, from and after the Effective Date, until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the terms of the Surviving Entity's Certificate of Incorporation and By-Laws and the Act. ARTICLE II-CONVERSION OF SHARES 2.1. Conversion of Shares. By virtue of the Merger, automatically and without any action on the part of the holder thereof, upon the effectiveness of the Merger, the following shall occur: 2.1.1. Each then-outstanding share of common stock, par value $10 per share, of the Association ("Common Stock"), other than (a) shares owned by the Company, Merger Sub or any direct or indirect wholly-owned subsidiary of the Company or Merger Sub (except for any shares of Common Stock held in trust accounts, managed accounts or in any similar manner as trustee or in a fiduciary capacity ("Trust Account Shares") and shares held as collateral or in lieu of a debt previously contracted ("Collateral Shares")), (b) shares held in the treasury of the Association and (c) shares of Common Stock the holders of which perfect any dissenters' rights they may have under applicable law, shall be converted into the right to receive $15.2867 per share (as such amount may be reduced pursuant to Section 2.3, the "Per Share Consideration"), without interest; -5- 2.1.2. Each then-outstanding share owned by the Company, Merger Sub or any direct or indirect wholly-owned subsidiary of the Company or Merger Sub (except for any Shares that are Trust Account Shares or Collateral Shares) shall be canceled and retired; 2.1.3. Each share issued and held in the Association's treasury shall be canceled and retired; 2.14. Each issued and outstanding share of common stock of Merger Sub shall be converted into one fully paid and nonassessable share of the common stock of the Surviving Entity; and 2.1.5. Until surrendered and exchanged in accordance with this Agreement, each certificate representing outstanding shares of Common Stock entitled to the Per Share Consideration (each such certificate, a "Certificate") shall, after the Effective Date, represent solely the right to receive, without interest, the Per Share Consideration multiplied by the number of shares of Common Stock evidenced by such Certificate and shall have no other rights. Neither the Association, the Company or Merger Sub shall be liable to any holder of shares of Common Stock for any Per Share Consideration (or interest with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 2.2. Dissenters' Rights. Notwithstanding any provision of this Agreement to the contrary, any shares of Common Stock outstanding immediately prior to the Effective Date held by a holder who has demanded and perfected the right, if any, to dissent from this Agreement in accordance with applicable law and as of the Effective Date has not withdrawn or lost such right to dissent shall not be converted into or represent a right to receive the Per Share Consideration, but the holder of such shares shall only be entitled to such rights as are granted by applicable law. If a holder of shares of Common Stock who dissents shall effectively withdraw or lose (through failure to perfect or otherwise) the right to dissent, then, as of the Effective Date or the occurrence of such event, whichever last occurs, those shares shall be converted into and represent only the right to receive the Per Share Consideration as provided in Section 2.1.1, without interest, upon the surrender of the Certificate representing those shares. The Association shall give the Company copies of any notice of dissent of any shares of Common Stock received by the Association, notice of any attempted withdrawals of any such notices of dissent and any other instruments served pursuant to applicable law received by the Association relating to stockholders' rights, if any, to dissent. The Association shall not, except with the prior written consent of the Company, voluntarily make any payment with respect to any dissenting shares of the Association, offer to settle or settle any demands for payment with respect thereto or approve any withdrawal of any such demands. 2.3. Adjustment to Per Share Consideration; Escrow Account. (a) In the event that the aggregate TILA Costs (as defined herein) exceed $30,000, the Per Share Consideration shall be reduced by an amount (determined on a per share basis) equal to the excess, in any, of the Qualifying TILA Costs (as defined herein) actually incurred and paid by the Association on or prior to Closing over $30,000. As used herein, the term "Qualifying TILA Costs" means only -6- those TILA Costs which are (i) for a sum certain, (ii) liquidated, and (iii) indefeasibly paid in full by the Association in cash on or prior to Closing; such term specifically excludes any TILA Costs which are contingent, unliquidated or unpaid. In the event that the Per Share Consideration is reduced as provided in this Section 2.3(a), at the Closing the Company will cause the Surviving Bank to assign to the Stockholder, as the representative of all of the former stockholders of the Association, any claims which the Association may have against any third party as a result of the TILA Violations (as defined in Section 5.16) giving rise to the adjustment in the Per Share Consideration; provided, however, that the Surviving Bank shall be entitled to receive the first $30,000 of any recoveries based upon, resulting from or arising out of the claims so assigned, together with the reimbursement in full of any out-of-pocket expenses incurred by the Surviving Bank in connection therewith (including, but not limited to, the fees and disbursements of counsel) before any amounts are paid to the former stockholders of the Association in respect thereof. No later than the business day immediately prior to the Closing, the Association shall certify to the Company the amount of the Qualifying TILA Costs and shall provide the Company with a reasonably detailed analysis of such Qualifying TILA Costs. (b) If the aggregate amount of TILA Costs (net of Qualifying TILA Costs for which a reduction in the Per Share Consideration has been made in accordance with paragraph (a)) exceeds $30,000, then the Company shall have the right exercisable at any time prior to the Closing, at its sole election, to either terminate this Agreement as provided in Section 7.1 as a result of the failure by the Association to satisfy the conditions of Section 6.3.10 or to further reduce the Per Share Consideration otherwise payable pursuant to Section 2.1.1 by paying into an escrow account (the "Escrow Account") with an unrelated third party financial institution selected by the Company and reasonably satisfactory to the Association (the "Escrow Agent") an amount equal to the sum of (i) such excess and (ii) the aggregate amount of the litigation expenses expected to be incurred or paid after the Closing (the "Excess TILA Costs"); provided, however, that the Company shall not have the right to terminate the Agreement as provided above if the aggregate amount of the Excess TILA Costs is less than $100,000. Amounts deposited into the Escrow Account shall be paid either to the Company (or its designee) to the extent that any TILA Costs are actually incurred by the Company or its subsidiaries or to the former shareholders of the Association in accordance with the terms of a mutually satisfactory escrow agreement to be entered into by the Company, the Stockholder, as the representative of the former shareholders of the Association, and the Escrow Agent at the time the Escrow Account is established. For purposes of this Agreement, TILA Costs shall include the maximum amount of all disputed claims, unless otherwise mutually agreed by the Association and the Company. ARTICLE III-REPRESENTATIONS AND WARRANTIES OF THE ASSOCIATION References herein to "Association Disclosure Schedules" shall mean all of the disclosure schedules required by this Article III, dated as of the date hereof and referenced to the specific sections and subsections of Article III of this Agreement, which have been delivered on the date hereof by the Association to the Company. The Association hereby represents and warrants to the Company as follows: -7- 3.1. Organization. 3.1.1. Association. The Association is a capital stock savings and loan association duly organized, validly existing and in good standing under the laws of the State of New Jersey. The Association has full power and authority, corporate and otherwise, to own or lease all of its properties and assets and to carry on its business as it is now being conducted. All eligible accounts of depositors issued by the Association are insured by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the fullest extent permitted by law. The Association Disclosure Schedule sets forth true and complete copies of the Association's Certificate of Incorporation and By-Laws, as in effect on the date hereof. 3.1.2. Subsidiaries. The Association has not previously and does not now own or control, directly or indirectly, any controlling equity interest in any corporation, company, association, partnership, joint venture or other entity or otherwise control, directly or indirectly, the management and policies of any such entity. 3.2. Capitalization. The authorized capital stock of the Association consists of 1,395,500 shares of Common Stock. As of the date hereof, there are 392,500 shares of Common Stock issued and outstanding. The Association Disclosure Schedules accurately set forth the names and addresses of each of the shareholders of the Association and the number of shares of Common Stock owned by each such shareholder. There are no shares of Common Stock issuable upon exercise of outstanding options. The Association has not adopted any plan pursuant to which capital stock may be issued. All issued and outstanding shares of Common Stock have been duly authorized and validly issued, have been issued without violating the pre-emptive or other rights of third-parties or the provisions of any applicable federal or state securities laws, are fully paid, and are nonassessable. The Association has not granted and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the transfer, purchase, subscription or issuance of any shares of the Association's capital stock and has not issued any securities representing the right to purchase, subscribe or otherwise receive any shares of such capital stock or any securities convertible into any such shares, and there are no agreements or understandings to which the Association is a party with respect to voting of any such shares. 3.3. Authority; No Violation. 3.3.1. Authority. The Association has full power and authority, corporate and otherwise, to execute and deliver this Agreement and to consummate the transactions contemplated hereby in accordance with the terms hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of the Association in accordance with the Certificate of Incorporation of the Association and all applicable laws and regulations. Except for stockholder approval of the Merger, no other corporate proceedings on the part of the Association are necessary to consummate the transactions so contemplated. -8- This Agreement constitutes a valid and binding obligation of the Association, enforceable against the Association in accordance with its terms. 3.3.2. Neither the execution and delivery of this Agreement by the Association, nor the consummation by the Association of the transactions contemplated hereby in accordance with the terms hereof, or compliance by the Association with any of the terms or provisions hereof, will (i) violate any provision of the Association's Certificate of Incorporation or By-Laws, (ii) assuming that the consents and approvals set forth below are duly obtained, violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Association or any of its properties or assets, or (iii) except as set forth in the Association Disclosure Schedule, violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of the Association under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, commitment, pledge, permit, deed of trust, license, lease, contract, agreement or other instrument or obligation or (assuming that the consents and approvals set forth below are duly obtained) any judgment, order, decree, law, rule or other restriction of any governmental authority, in each case to which the Association is a party, or by which the Association may be bound or to which any of its assets or properties are subject except, with respect to (ii) and (iii) above, such as individually or in the aggregate would not have a material adverse effect on the business, results of operations, assets, financial condition or prospects (financial and otherwise) (a "Material Adverse Effect") of the Association and which will not prevent or delay the consummation of the transactions contemplated hereby. Except for consents and approvals of or filings or registrations with or notices to the FDIC, the Office of Thrift Supervision ("OTS"), the New Jersey Department of Banking ("Department"), the New Jersey Department of Environmental Protection and Energy ("DEPE"), the stockholders of the Association, no consents or approvals of or filings or registrations with or notices to any third party or any public body or authority are necessary on behalf of the Association in connection with (x) the execution and delivery by the Association of this Agreement and (y) the consummation by the Association of the Merger and the other transactions contemplated hereby (including, without limitation, the "Post-Closing Merger" as defined herein) (other than consents, approvals, filings, registrations or notices, the failure of the Association to obtain which would not have a Material Adverse Effect). 3.4. Financial Statements. 3.4.1. The Association Disclosure Schedule sets forth copies of the consolidated statements of condition of the Association as of June 30, 1995 and June 30, 1994 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the fiscal years in the three-year period ended June 30, 1995, in each case accompanied by the audit reports of KPMG Peat Marwick LLP and Arthur Andersen LLP, independent public accountants with respect to the Association, and the unaudited -9- Thrift Financial Reports of the Association as of September 30, 1995 and December 31, 1995 (collectively, the "Association Financial Statements"). The audited Association Financial Statements (including the related notes) have been prepared in accordance with generally accepted accounting principles ("GAAP"), consistently applied during the periods covered thereby (except as may be indicated therein or in the notes thereto), and the Thrift Financial Reports have been prepared in accordance with generally accepted regulatory accounting principles, consistently applied during the periods covered thereby and the Association Financial Statements fairly present the consolidated financial condition of the Association as of the respective dates set forth therein, and the related consolidated statements of income, changes in stockholders' equity and cash flows (if any, in the case of the Thrift Financial Reports) fairly present the results of the consolidated operations, changes in stockholders' equity and cash flows of the Association for the respective periods set forth therein. 3.4.2. The books and records of the Association have been maintained in material compliance with all applicable legal and accounting requirements. 3.4.3. Except as and to the extent reflected, disclosed or reserved against in the Association Financial Statements (including the notes thereto), as of December 31, 1995 (the "Association Statement of Condition Date") the Association did not have any liabilities, whether absolute, accrued, contingent or otherwise, material to the business, operations, assets or financial condition of the Association which were required by GAAP (consistently applied) to be disclosed in the Association's consolidated statement of condition as of the Association Statement of Condition Date or the notes thereto. Since the Association Statement of Condition Date, the Association has not incurred any liabilities except in the ordinary course of business and consistent with prudent banking practice or except as related to the transactions contemplated by this Agreement. 3.5. Broker's and Other Fees. Except for Alex Sheshunoff Investment Banking, neither the Association nor any of its directors or officers has employed any broker or finder or incurred any liability for any broker's or finder's fees or commissions in connection with any of the transactions contemplated by this Agreement. All agreements with Alex Sheshunoff Investment Banking are set forth in the Association Disclosure Schedule. There are no other fees (other than time charges billed at usual and customary rates) payable by the Association to any consultants, including lawyers, accountants and investment bankers, in connection with the Merger or which would be triggered by consummation of the Merger or the termination of the services of such consultants by the Association. The Association has not paid, and will not pay, any fees to any attorney, accountant (other than customary accounting fees payable to KPMG Peat Marwick in an amount not to exceed $5,000), investment banker (other than fees payable to Alex Sheshunoff Investment Banking in an amount not to exceed $15,000 plus reasonable out-of-pocket expenses) or other consultant who or which represents any of the shareholders of the Association. -10- 3.6. Absence of Certain Changes or Events. 3.6.1. Except as disclosed in the Association Disclosure Schedule, there has not been any material adverse change in the business, results of operations, assets, prospects (financial or otherwise) or financial condition of the Association since the Association Statement of Condition Date, and to the best of the Association's knowledge, no facts or conditions exist which are likely to cause such a material adverse change in the future. 3.6.2 Except as disclosed in the Association Disclosure Schedule, the Association has not taken or permitted any of the actions described in Section 5.2 hereof between December 31, 1995 and the date hereof. 3.7. Legal Proceedings. Except as disclosed in the Association Disclosure Schedule, the Association is not a party to any, and there are no pending or, to the best of the Association's knowledge, threatened, legal, administrative, arbitrable or other proceedings, claims, actions or governmental investigations of any nature (collectively, "Legal Proceedings") against the Association and there are no pending or, to the best of the Association's knowledge, threatened Legal Proceedings which seek to enjoin, prohibit or delay the transactions contemplated hereby. Except as disclosed in the Association Disclosure Schedule, the Association is not a party to any order, judgment or decree entered in any lawsuit or proceeding (other than routine foreclosure or collection orders entered in the ordinary course of business). 3.8. Taxes and Tax Returns. 3.8.1. The Association has duly filed (and until the Effective Date will so file) all returns, declarations, reports, information returns and statements ("Returns") required to be filed by it in respect of any federal, state and local taxes (including withholding taxes, penalties or other payments required) and has duly paid when due (and until the Effective Date will so pay) all such taxes due and payable, other than taxes or other changes which are being contested in good faith (and disclosed to the Company in writing). The Association has established (and until the Effective Date will establish) on its books and records reserves that are adequate for the payment of all federal, state and local taxes not yet due and payable but which should be accrued in respect of the Association through such date in accordance with GAAP. The Association Disclosure Schedule identifies the federal income tax returns of the Association which have been examined by the Internal Revenue Service (the "IRS") within the past six years. No deficiencies were asserted as a result of such examinations which have not been resolved and paid in full. To the best knowledge of the Association, there are no audits or other administrative or court proceedings presently pending nor any other disputes pending with respect to, or claims asserted for, taxes or assessments upon the Association, nor has the Association given any currently outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any taxes or Returns. 3.8.2. Except as set forth in the Association Disclosure Schedule, the Association (i) has not requested any extension of time within which to file any Return which Return -11- has not since been filed, (ii) is not a party to any agreement providing for the allocation or sharing of taxes, (iii) is not required to include in income any adjustment pursuant to Section 481(a) of the Internal Revenue Code of 1986, as amended (the "Code"), by reason of a voluntary change in accounting method initiated by the Association (nor does the Association have any knowledge that the IRS has proposed any such adjustment or change of accounting method), and (iv) has not filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply. 3.9. Reports. The Association has, since January 1, 1991, duly filed with the OTS and the Department in form which was correct in all material respects the monthly, quarterly and annual financial reports required to be filed under applicable laws and regulations, and the Association promptly will deliver or make available to the Company accurate and complete copies of such reports. 3.10. Certain Contracts. 3.10.1. Except as disclosed in the Association Disclosure Schedule, (i) the Association is not a party to or bound by any written contract or understanding (whether written or oral) with respect to the employment of any officers, employees, directors or consultants, and (ii) the consummation of the transactions contemplated by this Agreement will not (either alone or upon the occurrence of any additional acts or events) result in any payment (either of severance pay or otherwise) becoming due from the Association, the Company or any affiliate of either such entity, to any officer, employee, director or consultant of the Association. The Association Disclosure Schedule sets forth true and correct copies of all severance or employment agreements with officers, directors, employees, agents or consultants to which the Association is a party. 3.10.2. Except as disclosed in the Association Disclosure Schedule and except for loan commitments issued in the ordinary course of business, (i) as of the date of this Agreement, the Association is not a party to or bound by any commitment, agreement or other instrument which is material to the business, operations, assets or financial condition of the Association, but in no event shall a contract for less than $10,000 per year be deemed material under this Section 3.10.2 or a contract for more than $25,000 per year be deemed immaterial under this Section 3.10.2, (ii) no commitment, agreement or other instrument to which the Association is a party or by which it is bound limits the freedom of the Association to compete in any line of business or with any person, and (iii) the Association is not a party to any collective bargaining agreement. 3.10.3. Except as disclosed in the Association Disclosure Schedule, the Association or, to the best knowledge of the Association, any other party thereto, is not in default in any material respect under any material lease, contract, mortgage, promissory note, deed of trust, loan or other commitment or arrangement, except for defaults which individually or in the aggregate would not have a Material Adverse Effect on the Association. -12- 3.11. Properties and Insurance. 3.11.1. The Association has good and, as to owned real property, marketable title to all material assets and properties, whether real, personal or mixed, tangible or intangible, reflected in the Association's consolidated statement of condition (as set forth in the Association Disclosure Schedule) as of the Association Statement of Condition Date, or owned and acquired subsequent thereto (except to the extent that such assets and properties have been disposed of for fair value in the ordinary course of business since the Association Statement of Condition Date), subject to no encumbrances, liens, mortgages, security interests or pledges, except (i) those items that secure liabilities that are reflected in said consolidated statement of condition or the notes thereto or that secure liabilities incurred in the ordinary course of business after the date of such consolidated statement of condition, (ii) statutory liens for amounts not yet delinquent or which are being contested in good faith, (iii) such encumbrances, liens, mortgages, security interests, pledges and title imperfections that are not in the aggregate material to the business, operations, assets and financial condition of the Association and (iv) with respect to owned real property, title imperfections noted in title reports set forth in the Association Disclosure Schedule. The Association as lessee has the right under valid and subsisting leases to occupy, use, possess and control all real property leased by the Association in all material respects as presently occupied, used, possessed and controlled by the Association. 3.11.2. The business operations and all insurable properties and assets of the Association are insured for its benefit against all risks which, in the reasonable judgment of the management of the Association, should be insured against, in each case under policies or bonds issued by insurers of recognized responsibility, in such amounts with such deductibles and against such risks and losses as are in the reasonable opinion of the management of the Association adequate for the business engaged in by the Association. As of the date hereof, the Association has not received any notice of cancellation or notice of a material amendment of any such insurance policy or bond and is not in default under any such policy or bond, no coverage thereunder is being disputed and all material claims thereunder have been filed in a timely fashion. 3.12. Minute Books. The minute books of the Association contain accurate records of all meetings and other corporate action held of its stockholders and Board of Directors (including committees thereof), for all meetings held and actions taken since January 1, 1991. 3.13. Reserves. As of the Association Statement of Condition Date, the allowance for loan losses in the Association Financial Statements was adequate based upon all factors required to be considered by the Association in determining the amount of such allowance. The methodology used to compute such allowance complies in all material respects with all applicable OTS and Department policies. As of the Association Statement of Condition Date, the reserve for OREO properties in the Association Financial Statements was adequate based upon all factors required to be considered by the Association in determining the amount of such reserve. -13- 3.14. No Parachute Payments. No officer, director, employee or agent (or former officer, director, employee or agent) of the Association is entitled now, or will or may be entitled to as a consequence of this Agreement or the Merger, to any payment or benefit from the Association, the Company or any subsidiary of the Association or the Company which if paid or provided would constitute an "excess parachute payment", as defined in Section 280G of the Code or regulations promulgated thereunder. The Association has established an adequate reserve in accordance with GAAP on the Association Financial Statements for all amounts payable to Gary Restivo pursuant to the Settlement Agreement, dated February 9, 1995 (the "Settlement Agreement"). 3.15. Disclosure. No representation or warranty contained in Article III of this Agreement or in the Association Disclosure Schedule contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 3.16. Employee Plans. Except as set forth in the Association Disclosure Schedule, the Association does not maintain, and has no liability of any kind or nature whatsoever (whether known or unknown, actual or contingent) under any former, employee benefit, welfare, bonus, deferred compensation, pension, profit sharing, stock option, employee stock ownership, consulting, severance or fringe benefit plans, formal or informal, written or oral, or any trust agreements related thereto, relating to any present or former directors, officers or employees of the Association 3.17. Compliance with Laws and Orders. Except as set forth in the Association Disclosure Schedule, the business of the Association has not been, and is not being, conducted in violation of any law, ordinance, regulation, judgment, order, decree, license or permit of any governmental entity (including, without limitation, all statutes, rules and regulations pertaining to the conduct of the banking business and the exercise of trust powers), except for possible violations which individually or in the aggregate do not, and, insofar as reasonably can be foreseen, in the future shall not, have a Material Adverse Effect on the Association. Except as set forth in the Association Disclosure Schedule, no investigation or review by any governmental entity with respect to the Association is pending or, to the knowledge of the Association, threatened, nor has any governmental entity indicated an intention to conduct the same, in each case other than those the outcome of which shall not have a Material Adverse Effect on the Association. 3.18. Agreements with Bank Regulators. Except as set forth in the Association Disclosure Schedule, neither the Association nor any of its shareholders is a party to any agreement or memorandum of understanding with, or a party to any commitment letter, Board resolution submitted to a regulatory authority or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, any governmental entity which restricts materially the conduct of the Association's business, or in any manner relates to its capital adequacy, its credit or reserve policies, its management or its stockholders, nor has the Association been advised by any governmental entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, -14- agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter or similar submission, except as set forth in the Association Disclosure Schedule. The Association Disclosure Schedule also describes the status of any such matter. The Association is required by Section 32 of the Federal Deposit Insurance Act to give prior notice to a Federal banking agency of the proposed addition of an individual to its board of directors or the employment of an individual as a senior executive officer. 3.19. Association Action. The Board of Directors of the Association (at a meeting duly called and held) has by the requisite vote of all directors present (a) approved this Agreement and (b) directed that the Agreement be submitted for consideration by the Association's stockholders. 3.20. Environmental Matters. 3.20.1. (a) For purposes of this Section 3.20.1, the following terms shall have the following meanings: "Branch Property" means all real property presently or formerly owned or operated by the Association on which branches or facilities are or were located. "Environmental Law" means any applicable federal, state or local statute, law, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction, directive, requirement or agreement with any Governmental Entity, now existing, relating to: (a) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended. The term Environmental Law includes, without limitation, (x) the following statutes, each as amended: (i) the federal Clean Air Act; (ii) the federal Clean Water Act; (iii) the federal Water Pollution Control Act of 1972; (iv) the federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto) ("RCRA"); (v) the federal Comprehensive Environmental Response Compensation Liability Act of 1980 (including the Superfund Amendments and Reauthorization Act of 1986) ("CERCLA"); (vi) the federal Toxic Substances Control Act; (vii) the federal Occupational Safety and Health Act of 1970; -15- (viii) the federal Emergency Planning and Community Right-to-Know Act of 1986; (ix) the federal Safe Drinking Water Act; (x) the federal Solid Waste Disposal Act; (xi) the federal Insecticide, Fungicide and Rodenticide Act; and (xii) the Industrial Site Recovery Act ("ISRA"). and (y) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. "Hazardous Substance" means any substance, whether liquid, solid or gas, listed, defined, designated, or classified as hazardous, toxic, radioactive, or dangerous under any applicable Environmental Law, whether by type or by quantity. Hazardous Substance includes, without limitation, (i) any "hazardous substance" as defined in CERCLA, (ii) any "hazardous waste" as defined in RCRA, and (iii) any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos, asbestos containing material, urea formaldehyde foam insulation, lead and poly chlorinated biphenyls ("PCBs"). "Real Property" means the Branch Property, all real property classified by the Association as OREO and all real property (including property held as trustee or in any other fiduciary capacity) over which the Association currently or formerly has exercised dominion, management or control. (b) Except as set forth in the Association Disclosure Schedule or as would not have a Material Adverse Effect on the Association: (i) the Association is and has been in compliance with all applicable Environmental Laws, (ii) the Real Property does not contain any Hazardous Substance in violation of any applicable Environmental Law, (iii) the Association has not received any written notices, demand letters or written requests for information from any governmental entity or any third-party indicating that the Association may be in violation of, or liable under, any Environmental Law. (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or threatened against the Association -16- with respect to the Association or the Real Property relating to any violation, or alleged violation, of any Environmental Law; (v) no reports have been filed, or are required to be filed, by the Association concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law on or at the Real Property; (vi) to the knowledge of the Association, there are no underground storage tanks on, in or under any of the Branch Property and no underground storage tanks have been abandoned or removed from any Branch Property while such Branch Property was owned or operated by the Association; and (vii) to the knowledge of the Association, the Association has not incurred, and none of the Real Property is presently subject to, any liabilities (fixed or, to the knowledge of the Association, contingent) relating to any suit, settlement, court order, administrative order, judgment or claim asserted or arising under any Environmental Law. (c) For purposes of this Section 3.20, "to the knowledge of the Association" shall mean to the knowledge of each person with the title of Vice President of the Association or higher. (d) There are no permits, licenses or registrations required under any Environmental Law with respect to the Branch Property presently operated by the Association; (e) The Association has not received written notice that any part of the Real Property has been or is listed as a site having thereon Hazardous Substances pursuant to any Environmental Law. 3.21. Labor Relations. Except as set forth in the Association Disclosure Schedule, the Association is not a party to or bound by any collective bargaining agreement respecting its employees, nor is there pending, or to the best knowledge of the Association threatened, any strike, walk out or other work stoppage or labor organizational effort. 3.22. Indemnification. Except as set forth in the Certificate of Incorporation and By-Laws of the Association or in the Association Disclosure Schedule, (i) the Association is not a party to any indemnification agreement with any of its present or future directors, officers, employees, agents or other persons who serve or served in any other capacity with any other enterprise at the request of the Association (a "Covered Person"), and (ii) to the best knowledge of the Association, there are no claims for which any Covered Person would be entitled to indemnification under the Certificate of Incorporation or By-Laws of the Association, or otherwise. -17- ARTICLE IV-REPRESENTATIONS AND WARRANTIES OF THE COMPANY References herein to "Company Disclosure Schedules" shall mean all of the disclosure schedules required by this Article IV, dated as of the date hereof and referenced to the specific sections and subsections of Article IV of this Agreement, which have been delivered on the date hereof by the Company to the Association. The Company hereby represents and warrants to the Association as follows: 4.1. Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of New Jersey. The Company has full power and authority, corporate and otherwise, to own or lease all of its properties and assets and to carry on its business as it is now being conducted. 4.2 Authority; No Violation. 4.2.1. Authority. The Company has full power and authority, corporate and otherwise, to execute and deliver this Agreement and to consummate the transactions contemplated hereby in accordance with the terms hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of the Company in accordance with the Certificate of Incorporation of the Company and all applicable laws and regulations. No other corporate proceedings on the part of the Company are necessary to consummate the transactions so contemplated. This Agreement constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 4.2.2. Neither the execution and delivery of this Agreement by the Company, nor the consummation by the Company of the transactions contemplated hereby in accordance with the terms hereof, or compliance by the Company with any of the terms or provisions hereof, will (i) violate any provision of the Company's Certificate of Incorporation or By-Laws, (ii) assuming that the consents and approvals set forth below are duly obtained, violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Company or any of its properties or assets, or (iii) except as set forth in the Company Disclosure Schedule, violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in the creation of any lien, security interest, charge or other encumbrance upon any of the properties or assets of the Company under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, commitment, pledge, permit, deed of trust, license, lease, contract, agreement or other instrument or obligation or any judgment, order, decree, law, rule or other restriction of any governmental authority, in each case to which the Company is a party, or by which the Company may be bound or to which any of its assets or properties are subject except, with respect to (ii) and (iii) above, such as individually or in the aggregate will not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole and which will not prevent or delay the consummation of the transactions contemplated hereby. -18- Except for consents and approvals of or filings or registrations with or notices to the FDIC, the Office of the Comptroller of the Currency (the "OCC"), the Department, the DEPE, the Federal Reserve Board and the OTS, no consents or approvals of or filings or registrations with or notices to any third party or any public body or authority are necessary on behalf of the Company in connection with (x) the execution and delivery by the Company of this Agreement and (y) the consummation by the Company of the Merger and the other transactions contemplated hereby. 4.3 Finances. At the Closing, the Company will have sufficient cash resources to consummate the Merger and to pay the Per Share Consideration. 4.4 Capital Ratio. The Company has no reason to believe that as of the Closing, on a pro forma basis giving effect to the Merger, (i) the Company's Tier I risk-based capital ratio will be less than 4%, (ii) the Company's total risk-based capital ratio will be less than 8%, or (iii) the Company's leverage ratio will be less than 5%. 4.5 CRA Compliance. The Company has no reason to believe that it is in material violation of the provisions of the Community Reinvestment Act of 1977, as amended. 4.6. Absence of Certain Changes or Events. There has not been any material adverse change in the business, results of operations, assets, prospects (financial or otherwise) or financial condition of the Company and its subsidiaries since September 30, 1995 and, to the best of the Company's knowledge, no facts or conditions exist which are likely to cause such a material adverse change in the future. 4.7. Reports. The Company's bank subsidiary, Union Center National Bank (the "Bank"), has, since January 1, 1995, duly filed with the OCC in form which was correct in all material respects the monthly, quarterly and annual financial reports required to be filed under applicable laws and regulations, and the Bank promptly will deliver or make available to the Association accurate and complete copies of such reports. 4.8. Disclosure. No representation or warranty contained in Article IV of this Agreement or in the Company Disclosure Schedule contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 4.9. Agreements with Bank Regulators. Neither the Company nor the Bank is a party to any agreement or memorandum of understanding with, or a party to any commitment letter, Board resolution submitted to a regulatory authority or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, any governmental entity which would materially affect the ability of the Company to perform its obligations hereunder nor has the Company or the Bank been advised by any governmental entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, extraordinary -19- supervisory letter, commitment letter or similar submission, except as disclosed in the Company Disclosure Schedule. 4.10. Company Action. The Board of Directors of the Company (at a meeting duly called and held) has by the requisite vote of all directors present (a) determined that the Merger is advisable and in the best interests of the Company and (b) approved this Agreement and the transactions contemplated hereby, including the Merger. 4.11. Broker's Fees. Other than Capital Consultants of Princeton, Inc., no person is or will be entitled to a broker's, finder's, investment banker's, financial adviser's or similar fee from the Company in connection with this Agreement or any of the transactions contemplated hereby. The fees and expenses of Capital Consultants of Princeton, Inc. shall be the sole responsibility of the Company. ARTICLE V-COVENANTS 5.1. Acquisition Proposals. The Association shall not, directly or indirectly, and shall instruct and otherwise use its best efforts to cause its stockholders, officers, directors, employees, agents or advisors or other representatives or consultants not to, directly or indirectly, (i) encourage, solicit or initiate any proposals or offers from any person relating to any acquisition or purchase of all or a material amount of the assets of, or any securities of, or any merger, consolidation or business combination with, the Association (such transactions are referred to herein as "Acquisition Transactions") or (ii) participate in any discussions or negotiations regarding, or furnish to any other person any information with respect to, an Acquisition Transaction. The Association shall promptly notify the Company orally and in writing of any proposal or offer regarding an Acquisition Transaction, any inquiries with respect thereto and any request for information relating thereto. Such written notification shall include the identity of the entity making such inquiry or Acquisition Transaction proposal or offer or request and such other information with respect thereto as is reasonably necessary to apprise the Company of the material terms of such Acquisition Transaction proposal or offer or request and all other material information relating thereto. 5.2. Interim Operations of the Association. During the period from the date of this Agreement to the Effective Date, except as expressly provided in this Agreement, as required by law, or as otherwise approved in writing and in advance by the Company: 5.2.1. Conduct of Business. The Association shall conduct its business only in, and not take any action except in, the ordinary course of the Association's business. The Association shall use reasonable efforts to preserve intact the business organization of the Association, to keep available the services of its present key officers and employees and to preserve the goodwill of those having business relationships with the Association. Without limiting the generality of the foregoing, the Association shall not pay interest on its deposits (or offer other incentives which have the effect of increasing the rate of -20- interest otherwise payable on such deposits) at a rate per annum which is significantly in excess of market interest rates on deposits of similar type, size and maturity. 5.2.2. Certificate of Incorporation and By-Laws. The Association shall not make any chage or amendment to its Certificate of Incorporation or By-Laws . 5.2.3. Capital Stock. The Association shall not issue or sell any shares of capital stock or any other securities or issue any subscriptions, options, warrants, rights, convertible securities or enter into any agreements or commitments of any character relating to the issued or unissued capital stock or other securities of the Association obligating the Association to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Association or obligating the Association to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment or enter into any arrangement or contact with respect to the purchase or voting of shares of its capital stock, or adjust, split, combine or reclassify any of its capital stock or other securities or make any other changes in its capital structure. 5.2.4. Dividends. The Association shall not declare, set aside, pay or make any dividend or other distribution or payment (whether in cash, stock or property) with respect to, or purchase or redeem, any shares of its capital stock; provided, however, that the payments to Alex Sheshunoff Investment Banking contemplated by Section 3.5 and compliance with the provisions of Section 6.3.6 and 6.3.8 shall be deemed not to violate the provisions of this Section 5.2.4. 5.2.5. Employee Plans, Compensation, Etc. Except as set forth in the Association Disclosure Schedule, the Association shall not adopt or amend any bonuses, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit agreements, trusts, plans, funds, employee stock ownership, consulting, severance or fringe benefit plan, formal or informal, written or oral, or other arrangements for the benefit or welfare of any director, officer or employee, or (except pursuant to commitments of the Association existing as of the date hereof as disclosed in the Association Disclosure Schedule) increase the compensation or fringe benefits of any director, officer or employee (other than in the ordinary course of business consistent with past practices) or pay any benefit not required by any existing plan or arrangement (including, without limitation, the granting of stock options or stock appreciation rights) or take any action or grant any benefit not required under the terms of any existing agreements, trusts, plans, funds or other such arrangements or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. 5.2.6. Representations and Covenants. The Association shall not take any action, or knowingly omit to take any action, that would, or that would reasonably be expected to, result in (A) any of the representations and warranties of the Association set forth in -21- Article III becoming untrue or (B) any of the conditions to closing set forth in Sections 6.1 or 6.3 not being satisfied. 5.2.7. Other Actions. The Association shall not take any action that would, in any such case, (i) materially delay or adversely affect the ability of the Association or its shareholders to obtain any approvals of governmental entities required to permit consummation of the Merger or (ii) materially adversely affect its ability to perform its obligations under this Agreement. 5.2.8. Environmental Actions. The Association shall not change any of its existing policies and practices with respect to taking any action that results or would be likely to result in it being deemed to exercise dominion, management or control over collateral securing any extension of credit (other than residential and one-to-four-family dwellings); provided, however that such practices comply with all Environmental Laws and provided further, however that the Association shall not take any such action with respect to any outstanding extension of credit (other than residential and one-to-four-family dwellings) in an amount of $25,000 or more or in connection with which there is reasonably anticipated to be an environmental exposure of $5,000 or more without prior consultation with the Company. 5.3. Company Representations and Covenants. The Company shall not take any action, or knowingly omit to take any action, that would, or that would reasonably be expected to, result in (A) any of the representations and warranties of the Company set forth in Article IV becoming untrue or (B) any of the conditions to closing set forth in Sections 6.1 or 6.2 not being satisfied. 5.4. Access and Information. Upon reasonable notice and at reasonable times, the Association shall afford to the Company and its representatives (including, without limitation, directors, officers and employees of the Company and its affiliates and counsel, accountants and other professionals retained by it) access during normal business hours throughout the period prior to the Effective Date to the books, records (including, without limitation, tax returns and work papers of independent auditors), properties, personnel and to such other information as the Company reasonably requests; provided, however, that the Association shall not be required to provide access to any such information if the providing of such access (i) would violate a binding contractual obligation, (ii) would, as advised by outside counsel, be reasonably likely to result in the loss or impairment of any privilege with respect to such information or (iii) would be precluded by any law, ordinance, regulation, judgment, order, decree, license or permit of any governmental entity. Any access granted to the Company pursuant to this Section 5.4 shall not in any way limit any representation or warranty set forth in this Agreement. The rights and obligations of each of the Bank and the Association pursuant to the Confidentiality Letter Agreements ("Confidentiality Agreements") between the Bank and the Association, shall survive the execution and delivery of this Agreement, and all information heretofore and hereafter obtained by the Company or any of its advisors pursuant to this Section 5.4 or otherwise shall be deemed Evaluation Material (as that term is defined in such Confidentiality Agreements) and shall remain subject to the provisions of such Confidentiality Agreements until the Effective Date. -22- 5.5. Certain Filings, Consents and Arrangements. The Company, the Bank and the Association shall (a) cooperate with the Company in filing all applications and reports required to be filed with all applicable governmental entities between the date of this Agreement and the Effective Date with respect to the Merger and the other transactions contemplated by this Agreement (including without limitation the Post-Closing Merger (as hereinafter defined) described in Section 5.6 hereof), (b) cooperate with one another (i) in promptly determining whether any other filings are required to be made or consents, approvals, permits or authorizations are required to be obtained under any other applicable federal, state or foreign law or regulation and (ii) in promptly making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such consents, approvals, permits or authorizations and (c) subject to the qualifications set forth in the proviso in Section 5.4, deliver to the other party hereto copies of all such reports and filings promptly after they are filed. Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be required to take any action that would subject it to any obligations under ISRA unless the Effective Date shall have occurred. 5.6 Post-Closing Merger. Immediately after the Effective Date, the Company, as the sole shareholder of the Association and the Bank, intends to merge the Association with and into the Bank (the "Post-Closing Merger"). The Association shall, at the Company's expense, take all actions reasonably requested by the Company, including without limitation the processing of all applications and filings contemplated by Section 5.5 hereof) in order to enable the Company to effect the Post-Closing Merger immediately after the Effective Date. For purposes of this Agreement, the term "Surviving Bank" shall mean the Bank as the surviving entity of the Post-Closing Merger and the term "Constituent Banks" shall mean the parties to the Post-Closing Merger. 5.7. Loan Sales. From time to time after the date hereof and prior to the Closing, the Company shall have the right to require the Association to dispose of one or more of the loans or other extensions of credit listed on Schedule 5.7 (the "Affected Loans") at the Closing. In the event that the Company wishes to exercise its rights under this Section 5.7, the Company shall give written notice to the Association referencing this Section 5.7 and setting forth the Affected Loans to be disposed. Promptly after receipt of such notice, the Association shall use its best efforts to dispose of the Affected Loans for cash to a bona fide purchaser in the open market at the Closing. The Association shall provide the Company with regular updates regarding the status of the Association's disposition activities upon request. Notwithstanding the foregoing, the Association shall not be required to comply with the provisions of this Section 5.7 until the Effective Date. 5.8. Assessment Accruals. To the extent permitted under GAAP, prior to the Closing the Association shall make appropriate provisions on its financial statements to account for any "special" or "one-time" SAIF assessments which may be imposed on the deposits of the Association subsequent to the Effective Date. Notwithstanding the foregoing, the Association shall not be required to comply with the provisions of this Section 5.8 until the Effective Date. -23- 5.9. Other Adjustments. Prior to the Closing, the Association shall write down the value of its bank premises to an amount which approximates the fair value of such premises as determined by the appraisals obtained by the Company. Notwithstanding the foregoing, the Association shall not be required to comply with the provisions of this Section 5.9 until the Effective Date. 5.10. Additional Agreements. Subject to the terms and conditions herein provided, each of the parties hereto shall use its best efforts to take promptly, or cause to be taken, all actions and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement (including, without limitation, the Post-Closing Merger), including, without limitation, using its best efforts to obtain all necessary actions or non-actions, extensions, waivers, consents and approvals from all applicable governmental entities, effecting all necessary registrations and filings (including, without limitation, making all filings under any applicable banking and securities laws) and obtaining any required contractual consents. If, at any time after the Effective Date, the Surviving Bank considers or is advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Bank its right, title or interest in, to or under any of the rights, properties or assets of either of the Constituent Banks acquired or to be acquired by the Surviving Bank as a result of, or in connection with the Merger or the Post-Closing Merger or otherwise to carry out the purposes of this Agreement, the officers and directors of the Surviving Bank shall be authorized to execute and deliver, in the name and on behalf of each of the Constituent Banks or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Constituent Banks or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and al right, title and interest in, to and under such rights, properties or assets in the Surviving Bank or otherwise to carry out the purposes of this Agreement. 5.11. Publicity. The initial press release announcing this Agreement shall be a joint press release reasonably acceptable to the Association and the Company, and thereafter (until the Effective Date) the Association and the Company shall consult with each other before issuing any press releases with respect to the transactions contemplated hereby or making any filings with any governmental entity with respect thereto. 5.12. ISRA Approval. The Association, at its sole cost and expense, shall obtain prior to the Effective Date (i) a determination from the DEPE that the Merger is not subject to the requirements of ISRA, or (ii) an order issued by the DEPE pursuant to ISRA authorizing the consummation of the transaction contemplated by this Agreement prior to the issuance of any "Negative Declarations" or approval of any "Clean-Up Plans," as such terms are defined under ISRA or (iii) "Negative Declarations" or approvals of any "Clean-up Plans" with respect to each property in New Jersey which the Association owns or operates, in each case to the extent that such property renders the provisions of ISRA applicable to the transaction contemplated by this Agreement. The Association will post or have posted with the DEPE a surety bond or other financial security approved by the DEPE in an amount requested by the DEPE as required in furtherance of the Association's obligations under this covenant. -24- 5.13. Employee Matters. The Company shall interview all of the existing employees of the Association so as to determine their relative qualifications and shall make appropriate staffing decisions with respect to those employees as the Company may determine in its sole discretion. 5.14. Transfer Covenants. From and after the date hereof, the Association shall not reflect on its books any Transfer (as such term is defined in the Inducement Agreement) of Trust Shares (as such term is defined in the Inducement Agreement) except in accordance with the terms of the Inducement Agreement. 5.15. Payment of Certain Amounts. Prior to Closing, the Association shall have fully discharged all of its obligations under the Settlement Agreement. 5.16. Truth in Lending Covenants. The Association shall take all actions as may be necessary or advisable to fully resolve all outstanding violations of the Truth in Lending Act ("TILA") and/or the provisions of Regulation Z promulgated thereunder, whether existing on the date hereof or arising prior to the Closing (the "TILA Violations"), on or prior to the Closing or as soon thereafter as practicable. Without limiting the generality of the foregoing, the Association shall (i) within 40 business days after the date hereof, deliver to all persons entitled thereto appropriate notices of their right to rescind extensions of credit made by the Association meeting the requirements of TILA and 12 C.F.R. 226.23(A) (as determined in the written opinion of Hehl & Hehl, special independent counsel to the Association, which opinion shall be satisfactory, in form and substance, to the Company), (ii) rescind any outstanding extension of credit which is the subject of a TILA Violation if such rescission is timely requested by any person entitled by TILA and Regulation Z to rescind such credit, (iii) pay any statutory and other damages resulting from the TILA Violations, and (iv) pay any other fines, penalties, charges, costs, expenses or damages incurred in connection with the provisions of this Section 5.16; provided, however, that the Company expressly acknowledges that the Association shall have the right to institute appropriate proceedings if the Association deems such proceedings to be reasonably necessary in fully resolving the TILA Violations and the effects thereof. 5.17. Planning Board Determinations. The Association shall use its best efforts to obtain the Planning Board determinations contemplated by the letter agreement, dated February 14, 1996 (the "Side Letter"), from Washington Group, Ltd., Lehigh Financial Corp., the Stockholder and Mildred Margolis to the Company and the Association. ARTICLE VI-CONDITIONS 6.1. Conditions to Each Party's Obligations to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Date of the following conditions: 6.1.1. The Merger shall have been approved and adopted by the requisite vote of the holders of the Common Stock. -25- 6.1.2. All authorizations, consents, orders or approvals of, and all expirations of waiting periods imposed by, any governmental entity or other third party (collectively, "Consents") which are necessary for the consummation of the Merger and the Post-Closing Merger (other than immaterial Consents, the failure to obtain which would not have a material adverse effect on the Company or the Association) shall have been obtained or shall have occurred and shall be in full force and effect at the Effective Date; provided, however, that the entry by a court, in any suit brought by a private party or governmental entity challenging the Merger or the Post-Closing Merger as violative of the antitrust laws, of an order or decree permitting the Merger or the Post-Closing Merger, but requiring that any of the businesses, product lines or assets of the Bank or the Association be held separate thereafter, shall not be deemed to satisfy the conditions specified in this Section 6.1.2. 6.1.3. No temporary restraining order, preliminary or permanent injunction or other order by any federal or state court in the United States which prevents the consummation of the Merger or the Post-Closing Merger shall have been issued and remains in effect. 6.2. Conditions to Obligations of the Association to Effect the Merger. The obligation of the Association to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Date of the additional following conditions: 6.2.1. The Company shall have performed in all material respects its covenants contained in this Agreement required to be performed at or prior to the Effective Date. 6.2.2. The representations and warranties of the Company contained in this Agreement shall be true in all material respects when made, and as of the Effective Date as if made at and as of such time, except as expressly contemplated or permitted by this Agreement and except for representations and warranties relating to a time or times other than the Effective Date which were or shall be true in all material respects at such time or times. 6.2.3. The Company shall have delivered to the Association a Certificate dated the date of the Closing, signed by the President or Chief Financial Officer of the Company that, to the best of his knowledge and belief after due inquiry, the conditions set forth in Sections 6.2.1 and 6.2.2 have been satisfied. 6.3. Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger shall be subject to the fulfillment or waiver at or prior to the Effective Date of the additional following conditions: 6.3.1. The Association shall have performed in all material respects its covenants contained in this Agreement required to be performed at or prior to the Effective Date. -26- 6.3.2. The representations and warranties of the Association contained in this Agreement shall be true in all material respects when made, and as of the Effective Date as if made at and as of such time, except as expressly contemplated or permitted by this Agreement and except for representations and warranties relating to a time or times other than the Effective Date which were or shall be true in all material respects at such time or times. 6.3.3. The Association shall have delivered to the Company a Certificate dated the date of the Closing, signed by the Chief Executive Officer or Chief Financial Officer of the Association that, to the best of his knowledge and belief after due inquiry, the conditions set forth in Sections 6.3.1 and 6.3.2 have been satisfied. 6.3.4. The Trustee shall have voted in favor of the transactions contemplated hereby, including the Merger, and no default, breach or violation of any of the representations, warranties, covenants and agreements of the Trustee contained in the Inducement Agreement (or any certificate or other document delivered pursuant thereto) shall have occurred and be continuing. 6.3.5. Prior to or at the Closing, the Company shall have received general releases, in form and substance satisfactory to the Company, executed by each of the Trustee and the Stockholder, in favor of the Association and certain related parties and containing such other terms as the Company may reasonably require. 6.3.6. Prior to or at the Closing, the Bank and the Stockholder shall have entered into an agreement, in form and substance satisfactory to the Bank, granting the Bank the right to either terminate the Association's lease of the premises located at 952 Stuyvesant Avenue, Union, New Jersey on the 90th day after the Closing or, at the Bank's option, continue such lease on a month-to month basis for up to three months after the end of such 90-day period and containing such other terms as the Bank may reasonably require. 6.3.7. The aggregate deposits of the Association as of a date not more than five business days prior to the Closing shall not be less than $62.5 million and the Association shall have provided the Company with satisfactory evidence regarding the composition and amounts of such deposits as of such date. 6.3.8. The Association shall have entered into agreements satisfactory to the Bank regarding the premises located at 944 Stuyvesant Avenue, Union, New Jersey such that the Surviving Bank shall not be obligated either to lease such premises from the owner thereof or to sublet such premises to any sublessee thereof and such other agreements relating to such premises as are described in the Side Letter. 6.3.9. The Company shall have received all such assurances as it shall reasonably require to the effect that the Post-Closing Merger may be consummated immediately after the Effective Date without any further approvals or consents of any governmental authority. -27- 6.3.10. The Company shall have received satisfactory evidence that (i) the Association has taken all actions necessary to resolve all outstanding TILA Violations in accordance with Section 5.16 and (ii) subject to the provisions of Section 5.16, at the Closing the Association is in full compliance in all respects with the provisions of TILA and Regulation Z promulgated thereunder; provided, however, that this condition shall be deemed not to have been met if the costs incurred or expected to be incurred by the Association in complying with the provisions of Section 5.16 (including, without limitation, all out-of-pocket expenses, the fees and disbursements of counsel to the Association, all fines, penalties, charges, costs, expenses or damages, all interest and fees foregone or refunded in respect of extensions of credit which are rescinded pursuant to Section 5.16 and all expenses incurred or to be incurred in connection with any proceedings relating thereto) exceed $30,000 in the aggregate, net of all amounts actually received by the Association in reimbursement thereof prior to Closing (collectively, "TILA Costs"). For purposes of this Section 6.3.10, TILA Costs shall be reduced by the sum of (i) the aggregate amount of Qualifying TILA Costs deducted from the Per Share Consideration in respect thereof as provided in Section 2.3 hereof and (ii) the aggregate amount, if any, deposited by the Company into the Escrow Account in accordance with Section 2.3. 6.3.11. The Company shall have received satisfactory evidence that the representations and warranties set forth in the second paragraph of the Side Letter are true and correct in all material respects as of the Closing. ARTICLE VII-MISCELLANEOUS 7.1. Termination. This Agreement may be terminated at any time prior to the Effective Date, whether before or after approval by the stockholders of the Association: 7.1.1. by mutual consent of the Company and the Association; 7.1.2. by either the Company or the Association if the Merger shall not have been consummated on or before December 31, 1996 (provided the terminating party is not otherwise in material breach of its obligations under this Agreement); 7.1.3. by either the Company or the Association, in the event of (i) a breach by the other party of any representation or warranty contained herein, which breach has not been cured within thirty (30) days after the giving of written notice to the breaching party of such breach and which breaches, individually or in the aggregate, would cause the conditions set forth in Sections 6.2.2, 6.3.2 or 6.3.4 as the case may be, not to be met if the date of the action described above were the date of the Closing or (ii) a material breach by the other party of any of the covenants or agreements contained herein, which breach has not been cured within thirty (30) days after the giving of written notice to the breaching party of such breach; -28- 7.1.4. by the Association if any of the conditions specified in Sections 6.1 and 6.2 have not been met or waived by the Association at such time as such conditions can no longer be satisfied; 7.1.5. by the Company if any of the conditions specified in Sections 6.1 and 6.3 have not been met or waived by the Company at such time as such condition can no longer be satisfied; and 7.1.6. by the Company in the event of any material breach of the provisions of the Inducement Agreement. 7.2. Non-Survival of Representations, Warranties, and Agreements. The representations, warranties and covenants in this Agreement shall terminate at the Effective Date or the earlier termination of this Agreement pursuant to Section 7.1, as the case may be; provided, however, that if the Merger is consummated, Sections 5.10, 7.2 and 7.5 hereof shall survive the Effective Date to the extent contemplated by such Sections; provided, further, however that the last sentence of Section 5.4 and all of Section 7.5 hereof shall in all events survive any termination of this Agreement. 7.3. Interpretation. Unless the contest of this Agreement expressly indicates otherwise, (i) any singular term in this Agreement shall include the plural and any plural term shall include the singular and (ii) the term section or schedule shall mean a section or schedule of or to this Agreement. Each of the parties hereto acknowledge that this Agreement has been prepared jointly by the parties hereto, and shall not be strictly construed against either party. 7.4. Parties in Interest; Assignment. This Agreement is not intended to nor shall it confer upon any other person other than the parties hereto any rights or remedies. 7.5. Expenses. 7.5.1. Subject to Section 7.5.2, the parties hereto shall each be responsible for their own costs and expenses relating to this Agreement. 7.5.2. If this Agreement is terminated by the Association or the Company pursuant to Sections 7.1.3, 7.1.4 or 7.1.5, respectively, because of the willful breach of any representation, warranty, covenant, undertaking or restriction contained in this Agreement and if the terminating party is not in material breach of any representation, warranty, covenant, undertaking or restriction contained in this Agreement, then the breaching party shall pay all costs and expenses of the terminating party; provided, however, that if this Agreement is terminated under circumstances other than those described in the preceding clauses of this Section 7.5.2, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. Nothing contained in this Section 7.5.2 shall constitute or shall -29- be deemed to constitute liquidated damages for the willful breach by a party of the terms of this Agreement or otherwise limit the rights of the non-breaching party. 7.5.3. Final settlement with respect to payment of fees and expenses by the parties to this Agreement pursuant to Section 7.5.2 shall be made within thirty (30) days of the termination of this Agreement. 7.6. Enforcement of the Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 7.7. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by and rule of law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party hereto. Upon any such determination that any term or other provision is invalid, illegal or incapable of being enforced, the partes hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are consummated to the extent possible. 7.8. Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be delivered personally, by facsimile or sent by certified, registered or express air mail, postage prepaid, and shall be deemed given when so delivered personally, or by facsimile, or if mailed, five days after the date of mailing, as follows: If to the Company: 2455 Morris Avenue Union, New Jersey 07083 Telephone: (908) 688-9500 Facsimile: (908) 688-3043 Attention: Jack Davis With a copy to: Lowenstein, Sandler, Kohl, Fisher & Boylan 65 Livingston Avenue Roseland, New Jersey 07068 Telephone: (201) 992-8700 Facsimile: (201) 992-5820 Attention: Peter H. Ehrenberg, Esq. If to the Association: 950 Stuyvesant Avenue -30- Union, New Jersey 07083 Telephone: (908) 686-6655 Facsimile: (908) 851-9523 Attention: Joseph LaMountain With copies to: Levy, Lybeck, Bertele & Beck 385 Morris Avenue P.O. Box 478 Springfield, New Jersey 07081 Telephone: (201) 912-7200 Facsimile: (201)912-7272 Attention: E. Robert Levy, Esq. and: Horace J. DePodwin c/o Economic Studies, Inc. One Gateway Center Suite 420 Newark, New Jersey 07102-4082 Telephone: (201) 621-0180 Facsimile: (201) 621-0182 and: Pitney, Hardin, Kipp & Szuch 200 Campus Drive Florham Park, New Jersey 07932-0950 Telephone: (201) 966-6300 Facsimile: (201) 966-1550 Attention: Joseph Lunin, Esq. 7.9. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New Jersey without reference to choice of law principles thereof. 7.10. Assignment; Successors and Assigns. This Agreement may not be assigned, and any attempted assignment shall be null and void. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives. 7.11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original agreement, but all of which together shall constitute one and the same instrument. 7.12. Titles and Headings. The titles, headings and table of contents in this Agreement are for reference purposes only, and shall not in any way affect the meaning or interpretation of this Agreement. -31- 7.13. Entire Agreement. This Agreement, including the Schedules attached hereto, and the Confidentiality Agreement shall constitute the entire agreement among the parties with respect to the matters covered hereby and shall supersede all previous written, oral or implied understandings among them with respect to such matters. 7.14. Amendment and Modification. This Agreement may only be amended or modified in writing signed by the party against whom enforcement of such amendment or modification is sought. 7.15. Waiver. Except as otherwise required by law, any of the terms and conditions of this Agreement may be waived at any time by the party or parties entitled to the benefit thereof, but only by a writing signed by the party or parties waiving such terms or conditions. [Remainder of page intentionally left blank] -32- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. CENTER BANCORP, INC. By: ________________________________ Name: Title: LEHIGH SAVINGS BANK, S.L.A. By: ________________________________ Name: Title: -33- FIRST AMENDMENT FIRST AMENDMENT, dated March , 1996 (this "Amendment"), to the Agreement and Plan of Merger, dated as of February 14, 1996 (the "Merger Agreement"), by and between Center Bancorp, Inc. (the "Company") and Lehigh Savings Bank, S.L.A. ("Lehigh"). W I T N E S S E T H: WHEREAS, the Company and Lehigh previously entered into the Merger Agreement; WHEREAS, pursuant to the Merger Agreement a subsidiary of the Company ("Merger Sub") is to be merged with and into Lehigh; and WHEREAS, the Merger Agreement provides that Merger Sub will be a New Jersey state chartered capital stock savings and loan association; and WHEREAS, the Company and Lehigh have agreed that it is in their mutual best interests that the Merger Agreement be amended to provide that Merger Sub will be a national association organized under the National Bank Act, as amended, and to make certain other changes relating thereto; and WHEREAS, except as expressly amended pursuant to the terms of this Amendment, the Merger Agreement shall continue in full force and effect; NOW, THEREFORE, in consideration of the mutual covenants contained herein, and intending to be legally bound, the parties hereto agree as follows: Section 1. The first recital of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "WHEREAS, the respective Boards of Directors of the Company and the Association, by the requisite vote required under applicable law, have each determined that it is in the best interests of the Company and the Association and their respective stockholders for the Company to acquire the Association by (i) organizing an interim national association (the "Merger Sub") and (ii) merging Merger Sub with and into the Association upon the terms and subject to the conditions set forth herein (the "Merger");" Section 2. Section 1.1 of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "1.1. Merger. Subject to the terms and conditions of this Agreement, on the Effective Date (as defined in Section 1.2), the Merger Sub shall be merged with and into the Association and the separate legal existence of Merger Sub shall thereupon cease in accordance with the applicable provisions of the National Bank Act, as amended (the "Act"), and any other applicable law. The Merger shall be treated as a taxable purchase of the Common Stock of the Association by the Company for federal and state income tax purposes." Section 3. Section 1.2 of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "1.2. Effective Date. As soon as practicable following fulfillment or waiver of the conditions specified in Article VI, and provided that this Agreement has not been terminated or abandoned pursuant to Section 7.1, Merger Sub and the Association (the "Constituent Entities") shall take all action (in the manner contemplated by this Agreement) necessary under the Act and any other applicable law to cause the Merger to become effective. The date upon which the Merger is declared effective by the applicable regulatory authority is hereinafter referred to as the "Effective Date."" Section 4. Section 1.3 of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "1.3. Effect of Merger. The Merger shall have the effects specified in the Act and other applicable law. Without limiting the generality of the foregoing, the corporate existence of each of Merger Sub and the Association shall be merged into each other and all of their respective rights, privileges and franchises, and their respective right, title and interest in and to all property of whatever kind, whether real, personal or mixed, and things in action and every right, privilege, interest or asset of value or benefit then existing shall be vested in the Association as the surviving entity of the Merger (sometimes hereinafter referred to as the "Surviving Entity")." Section 5. Section 1.5 of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "1.5. Certificate of Incorporation and By-laws. The Certificate of Incorporation and By-Laws of Merger Sub in effect immediately prior to the Effective Date shall be the Certificate of Incorporation and By-Laws of the Surviving Entity, until duly amended in accordance with their terms and applicable law." Section 6. Section 1.6 of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "1.6 Directors and Officers. The directors and officers of Merger Sub immediately prior to the Effective Date shall be the directors and officers, respectively, of the Surviving Entity, from and after the Effective Date, until their successors have been duly elected or appointed and qualified or until their earlier -2- death, resignation or removal in accordance with the terms of the Surviving Entity's Certificate of Incorporation and By-Laws and applicable law." Section 7. Except as expressly amended pursuant to the terms of this Amendment, the Merger Agreement shall continue in full force and effect. [Remainder of page intentionally left blank] -3- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. CENTER BANCORP, INC. By: ______________________________ Name: John J. Davis Title: President and Chief Executive Officer LEHIGH SAVINGS BANK, S.L.A. By: ______________________________ Name: Joseph LaMountain Title: President and Chief Executive Officer -4- EX-13.1 6 ANNUAL REPORT [CENTER BANCORP INC. LOGO] SUMMARY OF SELECTED STATISTICAL INFORMATION AND FINANCIAL DATA
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------------- Summary of Income Interest income $ 21,749 $ 18,983 $ 18,341 $ 17,492 $ 17,269 $ 16,975 Interest expense 8,787 5,914 6,762 7,328 8,815 8,827 ----------- ----------- --------- ----------- ----------- --------- Net interest income 12,962 13,069 11,579 10,164 8,454 8,148 Provision for loan losses 0 10 200 461 117 119 ----------- ----------- --------- ----------- ----------- --------- Income from earning assets 12,962 13,059 11,379 9,703 8,337 8,029 Other income 732 668 820 1,159 878 723 Other expense 8,138 8,116 7,384 6,753 5,480 5,094 ----------- ----------- --------- ----------- ----------- --------- Income before income tax expense 5,556 5,611 4,815 4,109 3,735 3,658 Income tax expense 1,516 1,434 1,014 916 1,046 1,135 ----------- ----------- --------- ----------- ----------- --------- Net income $ 4,040 $ 4,177 $ 3,801 $ 3,193 $ 2,689 $ 2,523 - ------------------------------------------------------------------------------------------------------------------------------- Statement of Financial Condition Data* Investments $ 209,692 $ 207,483 $ 206,844 $ 208,928 $ 136,877 $ 96,361 Total loans 97,570 88,805 65,745 59,517 59,443 68,778 Total assets 347,777 325,113 318,607 309,664 237,428 209,912 Deposits 295,666 290,175 294,469 286,665 215,714 186,828 Stockholders' equity 27,679 24,211 22,203 19,975 18,327 17,033 - ------------------------------------------------------------------------------------------------------------------------------- Dividends Cash dividends $ 1,775 $ 1,730 $ 1,623 $ 1,570 $ 1,395 $ 1,393 Dividend payout ratio 44% 41% 43% 49% 52% 55% - ------------------------------------------------------------------------------------------------------------------------------- Cash Dividends Per Share Cash dividends $ 1.20 $ 1.17 $ 1.11 $ 1.07 $ 0.95 $ 0.95 - ------------------------------------------------------------------------------------------------------------------------------- Earnings Per Share Net income $ 2.73 $ 2.83 $ 2.59 $ 2.18 $ 1.84 $ 1.72 - ------------------------------------------------------------------------------------------------------------------------------- Average Shares Outstanding Average shares outstanding 1,473,671 1,473,671 1,468,538 1,464,523 1,464,364 1,464,364 - ------------------------------------------------------------------------------------------------------------------------------- Operating Ratios Return on average assets 1.15% 1.27% 1.18% 1.19% 1.21% 1.26% Return on average equity 15.32% 17.59% 17.93% 16.35% 15.37% 15.34% - ------------------------------------------------------------------------------------------------------------------------------- Book Value Per Common Share Book value (at year end) $ 18.69 $ 16.39 $ 15.85 $ 14.30 $ 13.14 $ 12.22 - ------------------------------------------------------------------------------------------------------------------------------- Non-Financial Information Common stockholders 629 598 586 562 551 511 Staff 132 132 133 118 101 100 - -------------------------------------------------------------------------------------------------------------------------------
10 [UNION CENTER LOGO]
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1989 1988 1987 1986 1985 1984 - ------------------------------------------------------------------------------------------------------------------------------- Summary of Income Interest income $ 15,981 $ 14,713 $ 13,371 $ 11,459 $ 10,797 $ 8,962 Interest expense 8,253 6,773 5,995 4,795 4,698 3,873 ----------- ----------- ----------- ----------- ----------- ----------- Net interest income 7,728 7,940 7,376 6,664 6,099 5,089 Provision for loan losses 27 40 15 28 31 24 ----------- ----------- ----------- ----------- ----------- ----------- Income from earning assets 7,701 7,900 7,361 6,636 6,068 5,065 Other income 525 379 369 353 302 295 Other expense 4,509 3,950 3,427 3,162 3,001 2,832 ----------- ----------- ----------- ----------- ----------- ----------- Income before income tax expense 3,717 4,329 4,303 3,827 3,369 2,528 Income tax expense 1,165 1,345 1,501 1,485 1,248 828 ----------- ----------- ----------- ----------- ----------- ----------- Net income $ 2,552 $ 2,984 $ 2,802 $ 2,342 $ 2,121 $ 1,700 - ------------------------------------------------------------------------------------------------------------------------------- Statement of Financial Condition Data* Investments $ 80,963 $ 94,558 $ 97,983 $ 73,683 $ 62,965 $ 48,016 Total loans 70,348 63,720 49,760 40,560 44,183 40,886 Total assets 191,277 182,459 176,712 157,937 128,218 108,814 Deposits 168,909 161,195 161,917 145,523 115,091 94,800 Stockholders' equity 15,905 14,729 13,137 11,426 10,500 10,371 - ------------------------------------------------------------------------------------------------------------------------------- Dividends Cash dividends $ 1,393 $ 1,356 $ 1,165 $ 1,085 $ 927 $ 776 Dividend payout ratio 55% 45% 42% 46% 45% 46% - ------------------------------------------------------------------------------------------------------------------------------- Cash Dividends Per Share Cash dividends $ 0.95 $ 0.92 $ 0.80 $ 0.74 $ 0.61 $ 0.49 - ------------------------------------------------------------------------------------------------------------------------------- Earnings Per Share Net income $ 1.75 $ 2.03 $ 1.92 $ 1.59 $ 1.39 $ 1.07 - ------------------------------------------------------------------------------------------------------------------------------- Average Shares Outstanding Average shares outstanding 1,461,989 1,468,538 1,459,765 1,472,684 1,528,712 1,591,531 - ------------------------------------------------------------------------------------------------------------------------------- Operating Ratios Return on average assets 1.38% 1.65% 1.70% 1.78% 1.26% 1.38% Return on average equity 16.43% 22.52% 20.92% 20.35% 15.34% 16.43% - ------------------------------------------------------------------------------------------------------------------------------- Book Value Per Common Share* Book value (at year end) $ 9.97 $ 9.23 $ 8.23 $ 7.16 $ 7.12 $ 6.50 - ------------------------------------------------------------------------------------------------------------------------------- Non-Financial Information* Common stockholders 504 499 480 490 480 531 Staff 92 92 86 95 95 96 - ------------------------------------------------------------------------------------------------------------------------------- At year end.
11 [CENTER BANCORP INC. LOGO] FINANCIAL REVIEW Table of Contents Management's Discussion & Analysis ........................... 13 Consolidated Statements of Condition ......................... 30 Consolidated Statements of Income ............................ 31 Consolidated Statements of Changes in Stockholders' Equity ... 32 Consolidated Statements of Cash Flows ........................ 33 Notes to Consolidated Financial Statements ................... 34 Independent Auditors' Report ................................. 49 12 [UNION CENTER LOGO] 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 1995. Although net income for 1995 declined, earnings continue to reflect a healthy and stable performance. Net income for the twelve months ended December 31, 1995, amounted to $4,040,000 as compared to $4,177,000 and $3,801,000 earned in 1994 and 1993, respectively. The resulting earnings per share amounted to $2.73 as compared to $2.83 and $2.59 earned in 1994 and 1993, respectively. All share and per share amounts have been restated to reflect the five percent stock dividend in 1994. Earnings performance for 1995 was stable as compared to 1994. While net interest margins declined, the impact of that decline was largely offset by improvement in net operating overhead. The decline in net interest income was primarily a result of an increase in the cost of funds. An expanded level of net average earning assets was primarily supported by business related interest-bearing deposits. The Corporation's total assets grew to an all time year-end high of $347.8 million at December 31, 1995, increasing $22.7 million or 6.98 percent over December 1994 levels. The return on average assets was 1.15 percent in 1995, as compared with 1.27 percent and 1.18 percent in 1994 and 1993 respectively. The return on average shareholders' equity was 15.32 percent in 1995, as compared to 17.59 percent in 1994 and 17.93 in 1993. The Corporation's capital base remains strong. The Corporation's risk-based capital ratios at December 31, 1995 were 23.4 percent for Tier I capital and 24.3 percent for total capital. These ratios substantially exceed the minimum of 4 percent for Tier I capital and 8 percent for total capital under regulatory guidelines. The following sections discuss the Corporation's Results of Operations, Assets 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 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, which is a standard analytical technique designed to adjust tax-exempt income (primarily interest earned on various obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues. 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. 13 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) The following table presents the components of net interest income (on a tax equivalent basis) for the past three years.
Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 ---------------------------------- --------------------------------------- ----- Increase Increase (Decrease) from Percent (Decrease) from Percent (dollars in thousands) Amount Prior Year Change Amount Prior Year Change Amount - ---------------------------------------------------------------------------------------------------------------------------------- Interest income: Investments $ 13,930 $ 688 5.2 $ 13,242 $ 342 2.7 $ 12,900 Loans, including fees 7,526 1,827 32.1 5,699 304 5.6 5,395 Federal funds sold 293 251 597.6 42 (4) (8.7) 46 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 21,749 2,766 14.6 18,983 642 3.5 18,341 - ---------------------------------------------------------------------------------------------------------------------------------- Interest expense: - ---------------------------------------------------------------------------------------------------------------------------------- Certificates $100,000 or more 2,764 2,303 499.6 461 224 94.5 237 Deposits 5,921 556 10.4 5,365 (1,116) (17.2) 6,481 Short-term borrowings 102 14 15.9 88 44 100.0 44 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 8,787 2,873 48.6 5,914 (848) (12.5) 6,762 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income* 12,682 (107) (0.8) 13,069 1,490 12.9 11,579 Tax-equivalent adjustment 690 (175) (20.2) 865 (254) (22.7) 1,119 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income on a fully tax-equivalent basis $ 13,652 $ (282) (2.0) $ 13,934 $ 1,236 9.7 $ 12,698 ==================================================================================================================================
* Before the provision for loan losses. NOTE: The tax-equivalent adjustment was computed based on an assumed statutory Federal income tax rate of 34 percent. Adjustments were made for interest accrued on securities of state and political subdivisions. NET INTEREST INCOME Net interest income on a fully tax-equivalent basis decreased $282,000 or 2.0 percent to approximately $13.7 million during 1995 from approximately $13.9 million for 1994. The net interest margin decreased from 4.62 percent to 4.21 percent for 1995 due to the effect of the increased cost of funds reflecting the rise in short-term interest rates that prevailed throughout most of 1995. This was offset in part by an increase in the net average volume of interest-earning assets in 1995 as compared to 1994. The average balance of interest-earning assets and interest-bearing liabilities increased from $302.1 million and $244.7 million, respectively, in 1994 to $324.3 million and $260.1 million, respectively, in 1995. Net average interest-earning-assets increased from $57.4 million in 1994 to $63.8 million in 1995. The 1995 increases in average balances are primarily due to increased volumes of time deposits. The improvement of 95 basis points in the net volume of interest-earning assets was offset by the increases in the average cost of interest-bearing liabilities (2.42 percent in 1994 versus 3.37 percent in 1995). The increase in the average yield on interest-earning assets was only 35 basis points (6.57 percent in 1994 versus 6.92 percent in 1995). These various factors are reflected in the following table presenting a rate/volume analysis of changes in net interest income which indicates, for 1995, a net decrease of $771,000 from rate-related factors and a net increase of $489,000 from volume related factors. 14 [UNION CENTER LOGO] The table on page 29 (Average Balance Sheet with Interest and Average Rates) shows the Corporation's consolidated average balance of assets, liabilities and stockholders' equity, the amount of average interest-earning assets and interest-bearing liabilities, net interest income as a percentage of average interest-earning assets. The factors underlying these year-to-year changes in net interest income are reflected in the tables appearing below and on page 29, both of which have been presented on a tax-equivalent basis (assuming a 34 percent tax rate). The table presented below (Analysis of Variance in Net Interest Income Due to Volume and Rates) describes 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
1995/1994 1994/1993 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 ======================================================================================================================== Interest-earning assets: Investment securities: Taxable $ 244 $ 784 $1,028 $ 754 $ 81 $ 835 Non-taxable (595) 80 (515) (967) 220 (747) Federal funds sold 229 22 251 (15) 11 (4) Loans, net of unearned discounts 1,775 52 1,827 482 (178) 304 - ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,653 938 2,591 254 134 388 - ----------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Money market deposits (285) 338 53 (299) (366) (665) Savings deposits (184) 275 91 136 (373) (237) Time deposits 1,670 963 2,633 (8) 35 27 Other interest-bearing deposits (35) 117 82 116 (133) (17) Short-term borrowings (2) 16 14 5 39 44 - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,164 1,709 2,873 (50) (798) (848) - ---------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 489 $ (771) $ (282) $ 304 $ 932 $1,236 ======================================================================================================================
Interest income increased by $2.8 million from 1994 to 1995 and by $.6 million from 1993 to 1994. Contributing to the improvement in interest income during 1995 was the increased levels of earning-assets, as previously noted. Growth in the loan portfolio represented the most significant change. The Corporation's loan portfolio, particularly residential mortgages, home equity and consumer loans, increased on average a net $22.4 million. This was primarily funded through deposit growth. The loan portfolio (traditionally the highest yielding type of interest-earning asset) has improved to 29.4 percent of the Corporation's interest-earning assets (on average) during 1995 from 24.1 percent of such assets (on average) during 1994. Interest income generated from the loan portfolio in 1995 was adversely affected by declines in market rates coupled with continued refinancing activity in the portfolio as borrowers looked to capitalize on the prevailing lower interest rates available during the latter half of the year. Earnings were positively impacted by the rate related factors in the beginning of 1995 due to investment portfolio purchases, which were sufficient to offset the declines in the average volume of investment securities. During 1995 interest expense increased $2.9 million or 48.6 percent as compared with the twelve months ended December 31, 1994. This was 15 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) primarily a result of higher average funding costs, as short-term interest rates moved higher throughout most of 1995. The resulting average cost of funds to the Corporation increased by 95 basis points. This cost was further impacted by a change in the liability mix, as the Corporation had increased volumes of more costly interest-bearing liabilities and funding sources. During 1995, less expensive deposits such as NOW checking, Savings and Money Market accounts were replaced by more costly time deposits of $100,000 and over. Rate changes made by the Federal Reserve during 1995, along with inflationary fears and the expanding economy, pushed short-term interest rates higher during 1995. Despite subsequent easing by the Federal Reserve, there continues to be a disintermediation of rates in the short-term interest rate market. This in turn has effected the cost of funds associated with a number of the Corporation's funding products. i.e. municipal deposits tied to market indicies, "Jumbo" Certificates of Deposit, and short-term repurchase agreements. Management believes that this pressure and continued disparity in the level of interest rates in the short-term end of the yield curve will continue to exert upward pressure on the cost of funds into the beginning of 1996. Interest expense during 1994 declined $848,000 or 12.5 percent as compared with the twelve months ended December 31, 1993. This was primarily as a result of lower average interest rates, as market interest rates generally remained low during 1994 and the resulting average cost of funds to the Corporation remained low despite market pressures. Although the total average cost of interest-bearing funds decreased by 33 basis points, this positive change in funding costs was partially offset by the effects of a change in the liability mix, as the Corporation had increased volumes of more costly interest-bearing liabilities and funding sources. The growth in interest-bearing liabilities and funding sources has been primarily in NOW checking, Jumbo Certificates of Deposit and short-term borrowings. Money Market accounts of $100,000 and over continued to be reinvested in certificates to obtain higher rates. This trend is the result of deregulation of interest rates and expanded competition in the Corporation's market area which has in turn resulted in the offering of higher costing Certificates of Deposit. 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) declined to 3.55 percent in 1995 from 4.15 percent in 1994 and 3.78 percent in 1993. The decline in net interest spreads is primarily a result of the increased cost of interest-bearing liabilities and the Corporation's inability to fund a greater portion of the increase in earning-assets through increases in noninterest-bearing sources and core deposits. The Corporation's net interest yield (i.e., net interest income on a tax-equivalent basis, as a percentage of interest-earning assets) decreased by 41 basis points in 1995 from 1994, following an increase of 36 basis points to 4.62 percent in 1994 from 4.26 percent in 1993. The contribution of noninterest-bearing funds (i.e., the differential between the average rate paid on all sources of funds and the average rate paid on interest-bearing funding sources) increased in 1995 (66 basis points) from 1994 (48 basis points) and from 1993 (47 basis points). During the past three years, average noninterest-bearing sources have consistently increased as a percent of interest-earning assets to 19.4 percent in 1995 from 19.0 percent in 1994 and 18.1 percent in 1993. 16 [UNION CENTER LOGO] INVESTMENTS The average volume of investment securities decreased by $4.4 million in 1995 as compared to 1994. The tax-equivalent yield on investments increased to 6.53 percent or by 35 basis points from a yield of 6.18 percent during 1994. The increase in yields on the investment portfolio in 1995, was achieved due to higher market rates on purchases made to replace lower yielding investments which had matured. The impact of repricing activity on yields was lessened by shorter investment maturities, resulting in narrowed spreads, due to the change in investment strategies brought about by the current uncertainty of rates and the constraints imposed by SFAS No. 115. 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. On January 3, 1994, the Corporation adopted SFAS No. 115. In connection with this policy, management reviewed the composition of the investment portfolio and designated all municipal securities, certain fixed rate collateralized mortgage obligations, federal agency and U.S. treasury bonds as held-to-maturity. These securities are being carried at amortized cost. All other securities, comprised primarily of U.S. treasury notes and certain Federal Agency and CMO securities, with an amortized cost amounting to approximately $65.8 million, were designated as available-for-sale and marked to their estimated market values. Prior to the adoption of SFAS No. 115, the Corporation did not maintain an available-for-sale portfolio. All investment securities were carried at amortized cost. Pursuant to the provisions and implementation guidance contained within the special report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", on November 27, 1995, the Corporation reassessed the classification of all securities within its portfolio and transferred $17.9 million from its held-to-maturity investment portfolio to its available-for-sale portfolio. These securities had a market value of $17.9 million which resulted in the Corporation recording an unrealized gain on securities available-for-sale, net of tax, within shareholders' equity of $60,000. At December 31, 1995, the total investment portfolio excluding overnight investments, was $209.7 million, or 62.1 percent of earning assets, as compared to $207.5 million or 66.1 percent at December 31, 1994. 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 3 of the Notes to the Corporations's Consolidated Financial Statements. 17 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) 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 1995, the level of allowance returned to a year end balance of $1,073,000 as compared to the same year-end level at December 31, 1994, and a level of $943,000 at December 31, 1993. The Corporation had no charges to earnings (through the provision of loan losses) in 1995. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examination. The allowance for loan losses as a percentage of total loans amounted to 1.10 percent, 1.21 percent and 1.43 percent at December 31, 1995, 1994 and 1993, respectively. The Corporation's provision for loan losses required to reach these levels was $0, $10,000 and $200,000 for 1995, 1994 and 1993, respectively. During 1995 the Corporation did not experience any substantial problems within its loan portfolio. Net charge-offs were $0 in 1995. The Corporation has had no non-performing loans at year-end for the past five years. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged off. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" which applies to financial statements for fiscal years beginning after December 15, 1994. This statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the 1oan'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. Management has adopted the statement on January 1, 1995, with no material impact to the Corporation's financial position or results of operations. 18 [UNION CENTER LOGO] 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:
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 1992 1991 ======================================================================================================================= Average loans outstanding $ 95,216 $ 72,752 $ 66,656 $ 60,856 $ 62,087 ======================================================================================================================= Total loans at end of period $ 97,570 $ 88,805 $ 65,745 $ 59,517 $ 59,443 ======================================================================================================================= Analysis of the Allowance for Loan Losses Balance at the beginning of year $ 1,073 $ 973 $ 821 $ 507 $ 487 Charge-offs: Commercial 0 0 20 120 24 Real estate-mortgage 0 0 58 21 33 Installment loans 10 12 20 32 53 - ----------------------------------------------------------------------------------------------------------------------- Total charge-offs 10 12 98 173 110 - ----------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial 0 110 -- -- -- Real estate-mortgage 5 20 19 23 -- Installment loan 5 2 1 3 13 - ----------------------------------------------------------------------------------------------------------------------- Total recoveries 10 132 20 26 13 - ----------------------------------------------------------------------------------------------------------------------- Net charge offs: 0 (120) 78 147 97 ======================================================================================================================= Additions charged to operations $ 0 $ 10 $ 200 $ 461 $ 117 ======================================================================================================================= Balance at end of year $ 1,073 $ 1,073 $ 943 $ 821 $ 507 ======================================================================================================================= Ratio of net charge-offs during the year to average loans outstanding during the year 0.00% (.16%) 0.12% 0.24% 0.16% ======================================================================================================================= Allowance for Loan Losses as a percentage of total loans at end of year 1.10% 1.21% 1.43% 1.38% 0.85% =======================================================================================================================
19 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) 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; the Corporation was not significantly impacted by the recent extended recession. 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. At December 31, 1995, the Corporation had no non-accrual or restructured loans. Past due loans 90 days or more amounted to $48,000. Additionally, the Corporation did not have any other real estate owned (OREO) at December 31, 1995. NONINTEREST INCOME The following table presents the principal categories of noninterest income for each of the years in the three year period ended December 31, 1995.
Years Ended December 31, Years Ended December 31, - -------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 % change 1994 1993 % change ========================================================================================================================== Other income: Service charges, commissions and fees $ 570 $ 556 2.5 $ 556 $ 698 (20.3) Other income 113 112 0.9 112 109 2.8 Gain on securities sold 49 0 100.0 0 13 (100.00) - -------------------------------------------------------------------------------------------------------------------------- Total other noninterest-income $ 732 $ 668 9.6 $ 668 $ 820 (18.5) ==========================================================================================================================
Total other (noninterest) income, exclusive of gains on securities sold, reflects an increase of $15,000 or 2.2 percent in 1995. The primary component of the increase was the improvement made in fee revenue reflected in service charges, commissions and fees. This increase of $14,000 or 2.5 percent in such fees, was derived from checking account activity. For the 1994 period total other (noninterest) income, exclusive of gains on securities sold, reflects a decline of $139,000 or 17.2 percent. The primary component of the decline was a $142,000 reduction in service charges derived from business checking accounts resulting from a lower level of business activity. Other less significant factors contributing to the decline in service charges were reductions in other fee income sources resulting from lower levels of business activity and a reduction in automated teller fees. During 1995 there were $49,000 in net gains on securities sold. These sales were made from the Corporation's available-for-sale investment portfolio and were made as part of its interest rate risk management position. In 1994, there were no sales of securities from the Corporation's investment portfolio. 20 [UNION CENTER LOGO] NONINTEREST EXPENSE The following table presents the principal categories of noninterest expense for each of the years in the three-year period ended December 31, 1995.
Years Ended December 31, Years Ended December 31, - -------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 % change 1994 1993 % change ================================================================================================================================ Other noninterest-expense: Salaries and employee benefits $ 4,323 $ 3,846 12.4 $ 3,846 $ 3,530 9.0 Occupancy expense, net 712 773 (7.9) 773 595 29.9 Premises and equipment expense 794 692 14.7 692 508 36.2 Stationery and printing expense 295 331 (10.9) 331 322 2.8 Correspondent fees expense 70 107 (34.6) 107 177 (39.5) Computer expense 58 109 (46.8) 109 103 5.8 FDIC Insurance expense 338 649 (47.9) 649 619 4.8 Other expenses 1,548 1,609 (3.8) 1,609 1,530 5.2 - -------------------------------------------------------------------------------------------------------------------------------- Total other noninterest-expense $ 8,138 $ 8,116 0.3 $ 8,116 $ 7,384 9.9 ================================================================================================================================
Total other (noninterest) expense increased $22,000 or 0.3 percent in 1995 as compared to an increase of $732,000 or 9.9 percent from 1993 to 1994. Salaries and employee benefits accounted for 53.8 percent of total other expense for 1995, as compared to 47.4 percent and 47.8 percent for the years 1994 and 1993, respectively. Strict control over other expenses has been a key objective of Management. The Corporation's overhead ratio (other expenses less other income as a percentage of net interest income on a tax-equivalent basis) was 54.2 percent, 53.3 percent and 51.7 percent, respectively for 1995, 1994 and 1993. The ratio of other expenses to average assets has increased slightly to 2.50 percent in 1995 from 2.48 percent in 1994 which had increased from 2.29 percent in 1993. Salaries and employees benefits increased $477,000 or 12.4 percent in 1995. This increase is primarily attributed to expense arising from merit and promotional raises and higher benefit costs. The increase of $379,000 in such expense in 1993 was due to an increase in employee promotions, merit increases and the higher cost of benefits. Staffing levels overall amounted to 132, 132 and 133 full-time equivalent employees at December 31, 1995, 1994 and 1993, respectively. Employees' longevity has continued to be significant. As of December 31, 1995, the Corporation's employees, excluding officers, have been employed by the Corporation for an average of 308.68 weeks or 6.18 years. This factor contributes to the Corporation's continued productivity, as evidenced by the ratio of average assets, in millions, per full time equivalent employee, which amounted to $2.6 million, $2.5 million and $2.6 million in 1995, 1994 and 1993, respectively. Occupancy and bank premise expense increased $41,000 or 2.80 percent in 1995 over 1994. This increase in 1995 expense reflects the operating costs associated with the expanded facilities and operations, offset in part by operating overhead efficiencies achieved. The increase in such expenses of $362,000 or 32.8 percent in 1994 to 1993, reflect the increased costs associated with the new corporate headquarters and main office, and extraordinary weather related expense incurred during the winter months. During May of 1995, the Federal Deposit Insurance Corporation announced that the bank insurance fund had reached its targeted recapitalization level of 1.25 percent. Therefore, 21 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) under previously established mandates passed by Congress, the FDIC indicated that it would lower bank insurance premiums to 4 cents per $100.00 of deposits. The FDIC further indicated that it would rebate to banks the excess premiums that had been collected through the third quarter of 1995. Accordingly, the Corporation received a rebate of approximately $189,000 during September representing the excess premiums paid into the Bank Insurance Fund from May of 1995 through September 30, 1995. Effective with the fourth quarter of 1995, the Corporation's new assessment rate was lowered to the 4 cents per $100.00 of deposits. Subsequent to that change the FDIC announced that well capitalized banks would not be assessed annual insurance premiums and would only be subject to minimum fund membership fees. The Corporation's entire FDIC insurance fund assessment for 1996 is estimated at approximately $1,000. The decline in other expense of $61,000 or 3.8 percent in 1995 resulted from improved operating overhead efficiencies. The $79,000 or 5.2 percent increase in other expenses in 1994 over the 1993 period, resulted primarily from expanded marketing and advertising promotions and other operating expenses. Management believes that these increases were essential in light of expanded competition in the Corporation's market place and increased costs associated with regulatory compliance changes. In October, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which is effective beginning in 1996. SFAS 123 allows companies either to continue to account for stock-based employee compensation plans under existing accounting standards or adopt a fair value based method of accounting for stock options as compensation expense over the service period as defined in the new standard. SFAS 123 requires that if a company continues to account for stock options under APB opinion No. 25, it must provide proforma net income and earnings per share information as if the new fair value approach had been adopted. Center Bancorp will continue to follow the existing accounting standards for these plans and will make the required disclosure in 1996. 22 [UNION CENTER LOGO] INCOME TAXES The Corporation's provision for income taxes increased from 1993 to 1994 and from 1994 to 1995 primarily as a result of increased state taxes and a reduction of tax-exempt income. The effective tax rate for the Corporation for the periods ended December 31, 1995, 1994 and 1993 were 27.3 percent, 25.6 percent and 21.3 percent. The effective tax rate continues to be substantially less than the statutory Federal tax rate of 34 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. Tax-exempt interest income, on a tax-equivalent basis, decreased by $515,000 or 20.2 percent from 1994 to 1995, while this income also declined by $747,000 or 22.7 percent from 1993 to 1994. ASSET AND LIABILITY MANAGEMENT The composition of the Corporation's statement of condition is planned and monitored by the Asset and Liability Committee (ALCO). Asset and Liability management encompasses the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. In general, management's objective is to optimize net interest income and minimize interest rate risk by monitoring these components of the statement of condition. INTEREST SENSITIVITY The management of interest rate risk is also important to the profitability of the Corporation. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different from that of a supporting interest bearing liability, or when an interest bearing liability matures or when its interest rate changes in a time period different from that of an earning asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities, total earning assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. Interest sensitivity analysis attempts to measure the responsiveness of net interest income to changes in interest rate levels. The difference between interest sensitive assets and interest sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management's judgment as to projected interest rate trends. The Corporation's rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a short funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset sensitive position, and a ratio less than 1 indicates a liability sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and to reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a failing rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position. At December 31, 1995, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio) of .72:1.00 at the cumulative one year position. During much of 1995 the Corporation had a negative interest sensitivity gap at that position. The maintenance of a liability-sensitive position during 1995 has had an 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 will continue to be placed on interest-sensitivity matching with the objective of achieving a stable net interest spread during 1996. 23 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
INTEREST SENSITIVITY ANALYSIS December 31, 1995 - --------------------------------------------------------------------------------------------------------------------------- Daily Due After Due After Floating and Three Months One Year Due Within But Within Through Due After (dollars in thousands) Three Months One Year Five Years Five Years Total =========================================================================================================================== INTEREST-EARNING ASSETS: Loans $ 19,912 $ 1,079 $ 8,439 $ 66,140 $ 95,570 Investments 9,605 35,684 117,884 46,519 209,692 Other 16,000 16,000 - ---------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 45,517 $ 36,763 $ 126,323 $ 112,659 $ 321,262 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Time certificates of deposit of $100,000 or greater $ 38,216 $ 1,188 $ 117 $ 0 $ 39,521 Time certificates of deposit of less than $100,000 6,168 15,925 5,219 0 25,312 Other interest bearing deposits 29,838 0 56,501 83,859 170,198 Securities sold under agreements to repurchase 22,326 22,326 - ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 96,548 $ 17,113 $ 59,837 $ 83,859 $ 257,357 - ---------------------------------------------------------------------------------------------------------------------------- Cumulative interest earning assets $ 45,517 $ 82,280 $ 208,603 $ 321,262 $ 321,262 - ---------------------------------------------------------------------------------------------------------------------------- Cumulative interest bearing liabilities $ 98,548 $ 113,661 $ 173,498 $ 257,357 $ 257,357 - ---------------------------------------------------------------------------------------------------------------------------- Interest sensitivity gap $ (51,031) $ 19,650 $ 66,486 $ 28,800 $ 64,354 - ---------------------------------------------------------------------------------------------------------------------------- Cumulative interest-sensitivity gap (51,031) (31,381) 35,105 63,905 64,354 - ---------------------------------------------------------------------------------------------------------------------------- Interest-sensitive assets to interest sensitive liabilities 0.47 2.15 2.11 1.34 1.25 - ---------------------------------------------------------------------------------------------------------------------------- Cumulative ratio of interest-sensitive assets to interest sensitive liabilities 0.47 0.72 1.20 1.25 1.25 ============================================================================================================================
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 catagories 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. LIQUIDITY The liquidity position of the Corporation is dependent on successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers' requests for loans. Such needs can be satisfied by scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit in-flows. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cashflows, and adjusts positions as necessary to maintain adequate levels of liquidity. By using a variety of potential funding sources and staggering maturities, the risk of potential funding pressure is significantly reduced. Management also maintains 24 [UNION CENTER LOGO] 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 stable core deposit base. At December 31, 1995, core deposits (comprised of total demand and savings accounts plus money market accounts under $100,000) represented 68.0 percent of total deposits. More volatile rate sensitive deposits, concentrated in Certificates of deposit $100,000 and greater, increased to 3.6 percent of total deposits from 1.0 percent at December 31, 1994. This change has been brought about due to the sharp rise in short-term rates during the latter part of 1994 which continued into 1995. On February 14, 1996, the Corporation entered into a letter of intent to acquire the $74 million Lehigh Savings Bank, SLA (Lehigh) and its three branches located in Union County, New Jersey at a cost of approximately $6 million. The acquisition will be accounted for under the purchase method of accounting, and is subject to regulatory approval. As a result of the acquisition the excess of cost over fair market value of tangible assets acquired will be recorded as goodwill. CORE DEPOSITS MIX
December 31, December 31, ============================================================================================================================ 1995 1994 Net Change (dollars in thousands) Amount Percentage Amount Percentage 95 vs. 94 - ---------------------------------------------------------------------------------------------------------------------------- Demand Deposits $ 60,635 30.0 $ 56,872 26.0 7.11% NOW Accounts 42,811 21.1 57,494 26.2 -25.54% Regular Savings 71,075 35.0 76,448 34.9 -7.03% Money Market Deposits under $100 28,035 13.8 28,318 12.9 -1.00% - ---------------------------------------------------------------------------------------------------------------------------- Total core deposits $ 202,836 100.00 $219,132 100.00 -7.44% - ---------------------------------------------------------------------------------------------------------------------------- Total deposits $ 295,666 $390,175 2.05% - ---------------------------------------------------------------------------------------------------------------------------- Core deposits to total deposits 68% 76% -9.30% ============================================================================================================================
Short-term borrowings can be used to satisfy daily funding needs. Balances in those accounts fluctuate significantly 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 of approximately $1.9 million did not change from the 1994 period. The following table is a summary of securities sold under repurchase agreements for each of the last three years. (dollars in thousands) 1995 1994 1993 ================================================================================ Securities sold under repurchase agreements: Average interest rate: At year end 5.25% 4.56% 2.53% For the year 5.65% 5.16% 0.00% Average amount outstanding during the year: $ 1,887 $ 1,928 $ 1,740 Maximum amount outstanding at any month end 22,326 9,745 4,248 Amount outstanding at year end $ 22,326 $ 9,745 $ 0 =============================================================================== 25 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) CASHFLOW The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During 1995 cash and cash equivalents (which increased overall by $11.9 million) were provided (on a net basis) by operating and financing activities and used (on a net basis) in investing activities. The cash flow provided by the increase in deposits and short-term borrowings, coupled with a reduction in the investment portfolio at year end, supported the net increase in the loan portfolio and the property and equipment expenditures. Cash flow from operating activities, primarily net income contributed to the balance of the increase in cash. STOCKHOLDERS' EQUITY AND DIVIDENDS STOCKHOLDERS' EQUITY Stockholders' equity averaged $26.2 million during 1995, an increase of $2.3 million, or 9.66 percent, as compared to 1994. At December 31, 1995, stockholders' equity totaled $27.7, or 14.5 percent over the prior year. In November of 1993 the Corporation announced the offering of a dividend reinvestment and optional stock purchase plan. This plan, which contributed $232,000 in new capital during 1995, together with internal capital generation, is expected to enhance the Corporation's equity position. Book value per common share rose to $18.69 at year end 1995 from $16.39 the prior year, as adjusted to reflect the five percent stock dividend paid on August 1, 1994. 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 GUIDELINES The Federal Reserve Board has established a leverage test which requires banking institutions to maintain a 3.00 percent minimum of Tier I capital to total assets. The 3.00 percent minimum applies only to the most highly rated banks. All other institutions are expected to maintain an additional percentage of at least 100 to 200 basis points above the minimum. At December 31, 1995, total Tier l capital (defined as tangible stockholders' equity for common stock and certain perpetual preferred stock) amounted to $27.3 million or 7.84 percent of total assets. Total capital (defined as Tier I capital and Tier II capital which does not qualify as Tier I capital) amounted to $28.3 million or 8.15 percent of total assets. Tier I capital excludes the effect of SFAS No. 115. Under SFAS No. 115 at December 31, 1995, $416,010 of net unrealized gains, after tax effect, on securities available-for-sale are included as a component of stockholders' equity. 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 catagorized 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, 1995, the Corporation's estimated Tier I and total risk-based capital ratios were 23.4 percent and 24.3 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of December 31, 1995 of 4 percent for Tier I capital as a percentage of risk adjusted assets and the 8 percent minimum for the aggregate Tier I and Tier II capital to risk adjusted assets. The following table presents the components of the Corporation's risk-based capital at December 31, in each of the last three years. 26 [UNION CENTER LOGO] CAPITAL December 31, - -------------------------------------------------------------------------------- (in thousands) 1995 1994 1993 ================================================================================ RISKED-BASED CAPITAL TIER I CAPITAL Total shareholders' equity, as adjusted $ 27,263 $ 24,766 $ 22,203 - -------------------------------------------------------------------------------- Total Tier I capital $ 27,263 $ 24,766 $ 22,203 ================================================================================ TIER II CAPITAL Qualifying allowance for loan losses $ 1,073 $ 1,073 $ 943 - -------------------------------------------------------------------------------- Total Tier II capital 1,073 1,073 943 - -------------------------------------------------------------------------------- Total capital (Tier I + Tier II) $ 28,336 $ 25,839 $ 23,146 - -------------------------------------------------------------------------------- Risk-adjusted assets $116,713 $128,101 $ 95,524 - -------------------------------------------------------------------------------- Ratio of Tier I capital to risk-adjusted assets 23.36% 19.33% 20.78% - -------------------------------------------------------------------------------- Regulatory requirement minimum 4.00% 4.00% 4.00% - -------------------------------------------------------------------------------- Ratio of total capital to risk-adjusted assets 24.28% 20.17% 21.36% - -------------------------------------------------------------------------------- Regulatory requirement minimum 8.00% 8.00% 8.00% - -------------------------------------------------------------------------------- Total assets $347,777 $325,113 $318,607 - -------------------------------------------------------------------------------- Leverage ratio 8.15% 7.95% 6.97% ================================================================================ 27 [CENTER BANCORP INC. LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) SECURITY MARKET INFORMATION The common stock of the Corporation is inactively traded in the over-the-counter market. As of December 31, 1995, the Corporation had 629 common stockholders of record. This does not include beneficial owners for whom CEDE & Company or others act as nominees. On December 31, 1995, the closing market bid and ask price was $30.00-$32.00 respectively. During the last two fiscal years, the high and low bid prices (as reported by National Quotation Bureau) and dividends declared on common stock per share, adjusted for the 5 percent stock dividend paid on August 1, 1994. Common Stock Price Common 1995 1994 Dividends Declared - -------------------------------------------------------------------------------- High Low High Low 1995 1994 Bid Bid Bid Bid ================================================================================ Fourth Quarter 31.00 26.00 28.50 26.50 $ 0.30 $ 0.29 Third Quarter 26.50 25.00 27.14 25.00 0.30 0.29 Second Quarter 26.50 25.50 30.00 25.44 0.30 0.30 First Quarter 30.00 25.00 30.47 28.58 0.30 0.29 - -------------------------------------------------------------------------------- $ 1.20 $ 1.17 ================================================================================ These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. For information on dividend restrictions and capital requirements which may limit the ability to pay dividends, see Note 11 to the consolidated financial statements. Inflation, as measured by the Consumer Price Index, has been relatively steady during the last three years: 2.8 percent in 1995, 2.7 percent in 1994, and 2.7 percent in 1993. Since the Corporation's assets and liabilities are predominantly monetary, the effects of inflation on the Corporation's performance are primarily measured by the level and volatility of interest rates earned and paid. During the past three years, the prime rate changed several times, ranging from 10.0 percent to 6.0 percent. During this period, the Corporation was able to control interest rate risk, as a result of its continuing policy of managing its interest-sensitive assets and liabilities. 28 [UNION CENTER LOGO] AVERAGE STATEMENT OF CONDITION WITH INTEREST AND AVERAGE RATES YEARS ENDED DECEMBER 31,
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Average Interest Average Interest Average (tax equivalent basis, Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate =================================================================================================================================== ASSETS Interest-earning assets: Investment securities: Taxable $195,626 $12,590 6.44% $191,639 $11,562 6.03% $179,140 $10,727 5.99% Non-taxable 28,343 2,030 7.16% 36,688 2,545 6.94% 50,817 3,292 6.48% Federal funds sold 5,103 293 5.74% 1,013 42 4.15% 1,433 46 3.21% Loans, net of unearned income 95,216 7,526 7.90% 72,752 5,699 7.83% 66,656 5,395 8.09% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 324,288 22,439 6.92% 302,092 19,848 6.57% 298,046 19,460 6.53% - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets: Cash and due from banks 16,628 15,069 16,126 Other assets 11,420 11,443 9,621 Allowance for possible loan losses (1,070) (974) (897) - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest-earning assets 26,978 25,538 24,700 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $351,266 $327,630 $322,746 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Money market deposits $ 63,971 1,783 2.79% $ 75,375 1,730 2.30% $ 87,135 2,395 2.75% Savings deposits 72,995 1,917 2.63% 80,649 1,826 2.26% 75,421 2,063 2.74% Time deposits 72,143 3,822 5.30% 35,674 1,189 3.33% 35,929 1,162 3.23% Other interest-bearing deposits 49,469 1,163 2.35% 51,087 1,081 2.12% 45,926 1,098 2.39% Short-term borrowings 1,887 102 5.41% 1,928 88 4.56% 1,740 44 2.53% - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $260,465 8,787 3.37% $244,713 5,914 2.42% $246,151 6,762 2.75% - ----------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities: Demand deposits 62,878 57,200 53,945 Other noninterest-bearing deposits 310 331 313 Other liabilities 1,454 1,543 1,137 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest-bearing liabilities 64,642 59,074 55,395 Stockholders' equity 26,159 23,843 21,200 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and Stockholders' equity $351,226 $327,630 $322,746 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (tax equivalent basis) $13,652 $13,934 $12,698 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest spread 3.55% 4.15% 3.78% - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income as percent of earning assets 4.21% 4.62% 4.26% - ----------------------------------------------------------------------------------------------------------------------------------- Tax-equivalent adjustment (690) (865) (1,119) - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income $12,962 $13,069 $ 11,579 ===================================================================================================================================
29 [CENTER BANCORP INC. LOGO] CONSOLIDATED STATEMENTS OF CONDITION
(dollars in thousands) December 31, ==================================================================================================================================== 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 2) $ 14,172 $ 16,556 Federal funds sold 16,000 1,000 Securities purchased under agreement to resell 0 749 - ------------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 30,172 18,305 Investment securities held to maturity (approximate market value of $157,449 in 1995 and $161,026 in 1994) 156,030 166,618 Investmeent securities available for sale 53,662 40,865 Total investment securities (Note 3) 209,692 207,483 Loans, net of unearned income (Note 4) 97,570 88,805 Less--Allowance for loan losses (Note 4) 1,073 1,073 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans 96,497 87,732 Premises and equipment, net (Note 5) 7,462 7,443 Accrued interest receivable 3,643 3,938 Other assets 311 212 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $347,777 $325,113 ==================================================================================================================================== LIABILITIES Deposits: Non-interest bearing $ 60,635 $ 56,872 Interest bearing: Certificates of deposit $100,000 and over 39,521 10,308 Other 195,510 222,995 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 295,666 290,175 Federal funds purchased and securities sold under agreements to repurchase 22,326 9,745 Accounts payable and accrued liabilities (Notes 6 and 7) 2,106 982 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 320,098 300,902 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies (Note 12) Stockholders' equity (Notes 3, 10 and 11) Common stock, no par value: Authorized 20,000,000 shares; issued 1,682,301 and 1,673,805 shares in 1995 and 1994 respectively 4,199 3,967 Appropriated surplus 3,510 3,510 Retained earnings 21,368 19,103 - ------------------------------------------------------------------------------------------------------------------------------------ 29,077 26,580 Less--Treasury stock at cost (199,368 shares in 1995 and 1994, respectively) 1,814 1,814 Net unrealized (loss) on investment securities available for sale, net of taxes 416 555 - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 27,679 24,211 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $347,777 $325,113 ====================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 [UNION CENTER LOGO] CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share data) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Interest and fees on loans $ 7,526 $ 5,699 $ 5,395 Interest and dividends on investment securities: Taxable interest income 12,580 11,552 10,717 Nontaxable interest income 1,340 1,680 2,173 Dividends 10 10 10 Interest on Federal funds sold 293 42 46 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 21,749 18,983 18,341 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest on certificates of deposit $100,000 or more 2,764 461 237 Interest on other deposits 5,921 5,365 6,481 Interest on short-term borrowings 102 88 44 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 8,787 5,914 6,762 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 12,962 13,069 11,579 Provision for loan losses (Note 4) 0 10 200 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 12,962 13,059 11,379 - ------------------------------------------------------------------------------------------------------------------------------------ Other income: Service charges, commissions and fees 570 556 698 Other income 113 112 109 Gain on securities sold 49 0 13 - ------------------------------------------------------------------------------------------------------------------------------------ Total other income 732 668 820 - ------------------------------------------------------------------------------------------------------------------------------------ Other expense: Salaries and employee benefits (Note 6) 4,323 3,846 3,530 Occupancy expense, net 712 773 595 Premises and equipment expense 794 692 508 Stationery and printing expense 295 331 322 Correspondent fees expense 70 107 177 Computer expense 58 109 103 FDIC Insurance expense 338 649 619 Other expenses 1,548 1,609 1,530 - ------------------------------------------------------------------------------------------------------------------------------------ Total other expense 8,138 8,116 7,384 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income tax expense 5,556 5,611 4,815 Income tax expense (Note 7) 1,516 1,434 1,014 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 4,040 $ 4,177 $ 3,801 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share: (Based on 1,478,887, 1,473,671 and 1,468,538 weighted average shares outstanding in 1995, 1994 and 1993, respectively) - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 2.73 $ 2.83 $ 2.59 ====================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 [CENTER BANCORP INC. LOGO] CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993 ----------------------------------------------------------------------------------------------- Unrealized Gain Total Common Common (Loss) on Securities Stock- (in thousands, Stock Stock Appropriated Retained Treasury Available for sale holders' except per share data) Shares Amount Surplus Earnings Stock Net of Taxes Equity =================================================================================================================================== YEAR 1993 Balance January 1, 1993 1,396,632 $ 2,000 $ 3,497 $ 16,329 $ (1,851) $ -- $ 19,975 Net income 3,801 3,801 Cash dividend (1,623) (1,623) Exercise of stock option 4,000 13 37 50 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 1,400,632 $ 2,000 $ 3,510 $ 18,507 $ (1,814) $ -- $ 22,203 YEAR 1994 Unrealized gain on investment securities available for sale as of January 1, 1994 756 756 Net Income 4,177 4,177 Cash dividend (1,730) (1,730) Common stock dividend 70,054 1,851 (1,851) 0 Issuance of common stock 3,751 116 116 Net change in unrealized loss on investment securities available for sale (1,311) (1,311) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 1,474,437 $ 3,967 $ 3,510 $ 19,103 $ (1,814) $ (555) $ 24,211 YEAR 1995 Net income 4,040 4,040 Cash dividend (1,775) (1,775) Issuance of common stock 8,496 232 232 Net change in unrealized gain (loss) on investment securities available for sale 971 971 - ----------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1995 1,482,933 $ 4,199 $ 3,510 $ 21,368 $ (1,814) $ 416 $ 27,679 ===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 [UNION CENTER LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 =================================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,040 $ 4,177 $ 3,801 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 728 672 487 Provision for loan losses 0 10 200 Provision for deferred taxes 118 (125) 160 Gain on sale of investment securities 49 0 (13) (Increase) decrease in accrued interest receivable 295 (266) 192 (Increase) decrease in other assets (99) 330 274 Increase (Decrease) in other liabilities 1,186 (670) (136) Amortization of premium and accretion of discount on investment securities, net 674 904 974 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,991 5,032 5,939 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available for sale 7,691 7,027 0 Proceeds from maturities of securities held to maturity 84,335 42,628 84,860 Proceeds from sales of investment securities available for sale 7,629 0 4,716 Purchase of securities available-for-sale (6,435) (2,750) 0 Purchase of securities held to maturity (95,361) (49,349) (88,453) Net increase in loans (8,765) (22,940) (6,306) Property and equipment expenditures, net (747) (856) (4,021) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (11,653) (26,240) (9,204) - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 5,491 (4,294) 7,804 Dividends paid (1,775) (1,730) (1,623) Proceeds from issuance of common stock 232 116 0 Proceeds from exercise of stock option 0 0 50 Net increase (decrease) in short-term borrowing 12,581 9,745 (1,355) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 16,529 3,837 4,876 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease)in cash and cash equivalents 11,867 (17,371) 1,611 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 18,305 35,676 34,065 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 30,172 $ 18,305 $ 35,676 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Interest paid on deposits and short-term borrowings $ 8,641 $ 5,869 $ 6,683 Income taxes $ 1,397 $ 1,495 $ 897 Transfers from securities held to maturity to securities available for sale $ 17,819 $ 63,244 $ 0 Transfers from securities available for sale to securities held to maturity $ 0 $ 16,992 $ 0 ==================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDA TED FINANCIAL STATEMENTS 33 [CENTER BANCORP INC. LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Center Bancorp Inc. (the Corporation) are prepared on the accrual basis and include the accounts of the Corporation and its wholly-owned subsidiary, Union Center National Bank (the Bank). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. BUSINESS The Bank provides a full range of banking services to individual and corporate customers through branch locations in Union County, 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 agreement to resell. Generally, Federal funds are sold for one-day periods. INVESTMENT SECURITIES The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities," on April 1, 1994. SFAS No. 115 establishes the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under the provisions of SFAS No. 115, those investments will be classified into three categories: (1) held to maturity securities, which the Corporation has both the positive intent and ability to hold until maturity, will be reported at amortized cost; (2) trading securities, which are purchased and held principally for the purpose of selling in the near term, will be 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, will be reported at fair value with unrealized gains and losses, net of applicable income taxes, reported as a separate component of stockholders' equity and excluded from earnings. Investment securities that the Corporation has both the intent and ability to hold until maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts which are recognized on a level yield method, as adjustments to interest income. Investment securities identified for sale prior to their contractual maturities in order to meet asset and liability management objectives are classified as available for sale and carried at fair value. Investment securities gains or losses are determined using the specific identification method. INCOME TAXES On January 1, 1993 the Corporation adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which requires recognition of 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 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 in effect for the first year in which the differences are expected to be settled. The adoption of SFAS 109 was accounted for prospectively and did not have a significant impact on the Corporation's results of operations for the year ended December 31, 1993. 34 [UNION CENTER LOGO] NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 seriously past due and doubt exists as to the ultimate collection of interest or principal; in those cases the recognition of income is discontinued. 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. Effective January 1, 1995 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and its subsequent amendment SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114, as amended, addresses the accounting for impaired loans and requires that impaired loans be measured based on the present value of expected future cash flows discounted as the 1oan's effective interest rate or, as a practical expedient, at the 1oan's observable market price or at the fair value of the collateral if the loan is collateral dependent. The determination of impaired loans consisted of non-accrual loans and loans internally classified as substandard or below in each instance above an established dollar threshold. All loans below the established dollar threshold are considered homogenous and are considered in the Bank's normal credit evaluation process. Since the Company did not have any impaired loans and sufficiently evaluates the adequacy of the allowance for loan losses, there was no impact of adopting SFAS No. 114, as amended and these statements did not have an effect on the existing income recognition and charge-off policies for nonperforming loans. 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. Accordingly, the ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in market conditions in the state of New Jersey. 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. RECLASSIFICATIONS Certain reclassifications have been made in the consolidated financial statements for 1994 and 1993 to conform to the classifications presented in 1995. 35 [CENTER BANCORP INC. LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTANT 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. EARNINGS PER SHARE All share and per share amounts have been restated to reflect the 5% stock dividend on August 1, 1994. NOTE 2 CASH AND DUE FROM BANKS The subsidiary bank, Union Center National Bank, maintained average cash balances reserved to meet regulatory requirements of the Federal Reserve Board of approximately $2,900,000 and $3,900,000 at December 31, 1995 and 1994, respectively. NOTE 3 INVESTMENT SECURITIES The following table presents information related to the Corporation's portfolio of securities held for maturity and available for sale at December 31, 1995 and 1994.
DECEMBER 31, 1995 - ------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (dollars in thousands) Cost Gains Losses Value ============================================================================================================= SECURITIES HELD TO MATURITY: U.S. government and federal agency obligations $ 107,446 $ 0 $ 69 $ 107,377 Obligations of U.S. states and political subdivisions 42,877 639 0 43,516 Other securities 5,707 849 0 6,556 - ------------------------------------------------------------------------------------------------------------- $ 156,030 $ 1,488 $ 69 $ 157,449 =============================================================================================================
DECEMBER 31, 1995 - ------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (dollars in thousands) Cost Gains Losses Value ============================================================================================================= SECURITIES AVAILABLE FOR SALE: U.S. government and federal agency obligations $ 52,804 $ 693 $ 0 $ 53,497 Other securities 165 0 0 165 - ------------------------------------------------------------------------------------------------------------- $ 52,969 $ 693 $ 0 $ 53,662 =============================================================================================================
36 [UNION CENTER LOGO] NOTE 3 INVESTMENT SECURITIES (continued)
DECEMBER 31, 1994 - ------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (dollars in thousands) Cost Gains Losses Value ============================================================================================================= SECURITIES HELD TO MATURITY: U.S. government and federal agency obligations $ 111,139 $ 0 $4,649 $ 106,490 Obligations of U.S. states and political subdivisions 55,026 0 943 54,083 Other securities 453 0 0 453 - ------------------------------------------------------------------------------------------------------------- $ 166,618 $ 0 $5,592 $ 161,026 =============================================================================================================
DECEMBER 31, 1994 - ------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (dollars in thousands) Cost Gains Losses Value ============================================================================================================= SECURITIES AVAILABLE FOR SALE: U.S. government and federal agency obligations $ 40,084 $ 0 $ 883 $ 39,201 Obligations of U.S. states and political subdivisions 750 0 17 733 Other securities 931 0 0 931 - ------------------------------------------------------------------------------------------------------------- $ 41,765 $ 0 $ 900 $ 40,865 =============================================================================================================
The following table presents information for investments in securities held to maturity and securities available for sale at December 31, 1995, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call privileges of the issuer.
Held to Maturity Available for Sale ------------------------ ---------------------- Estimated Amortized Market Amortized Book/Market (dollars in thousands) Cost Value Cost Value ============================================================================================================= Due in one year or less $ 22,269 $ 19,457 $20,429 $ 21,189 Due after one year through five years 90,857 102,164 26,932 26,769 Due after five years through ten years 42,904 35,828 5,608 5,704 - ------------------------------------------------------------------------------------------------------------- $ 156,030 $ 157,449 $52,969 $ 53,662 =============================================================================================================
Pursuant to the provisions and implementation guidance contained within the special report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", on November 27, 1995, the Corporation reassessed the classification of all securities within its portfolio and transferred $17.9 million from its held-to-maturity investment portfolio to its available-for-sale portfolio. These securities had a market value of $17.9 million which resulted in the Corporation recording an unrealized gain on securities available-for-sale, net of tax, within shareholders' equity of $60,000. 37 [CENTER BANCORP INC. LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 INVESTMENT SECURITIES (continued) Investment securities having a carrying value of approximately $33,500,000 and $20,000,000 at December 31, 1995 and 1994, respectively, were pledged to secure public deposits, short-term borrowings and for other purposes required or permitted by law. The amortized cost and market values of investment securities with an amortized cost in excess of ten percent of stockholders' equity at December 31, 1995 and 1994, were as follows:
1995 1994 - ------------------------------------------------------------------------------------------------------------ Amortized Market Amortized Market (dollars in thousands) Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------ Jefferson Township, New Jersey $ -- $ -- $ 3,225 $ 3,193 State of Connecticut General Obligation -- -- 3,350 3,365 Broward County, Florida -- -- 2,750 2,674 Lodi, New Jersey General Obligation -- -- 2,117 2,048 State of Texas General Obligation 3,747 3,940 3,745 3,674 Maricopa, Arizona -- -- 2,750 2,674 Seattle, Washington General Obligation -- -- 2,690 2,200 - ------------------------------------------------------------------------------------------------------------ Total $ 3,747 $ 3,940 $ 20,627 $ 19,828 ============================================================================================================
NOTE 4 LOANS AND THE ALLOWANCE FOR LOAN LOSSES The following table sets forth the composition of the Corporation's loan portfolio at December 31, 1995 and 1994, respectively.
(dollars in thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------ Real estate--residential mortgage $ 69,954 $ 64,666 Real estate--commercial 13,603 12,427 Commercial and industrial 7,699 6,247 Installment 6,841 6,250 All other 171 31 Less unearned income (698) (785) - ------------------------------------------------------------------------------------------------------------ Loans, net of unearned income $ 97,570 $ 88,805 ============================================================================================================
At December 31, 1995 and 1994 loans to officers and directors aggregated approximately $3,039,000 and $2,769,000 respectively. During the year ended December 31, 1995, the Corporation made new loans to officers and directors in the amount of $1,374,000; payments by such persons during 1995 aggregated $1,104,000. 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. 38 [UNION CENTER LOGO] NOTE 4 LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued) At December 31, 1995 the Corporation had no impaired loans or related allocations to the allowance for loan losses, as defined by SFAS 114. The average recorded investment in impaired loans was $0 for the year ended December 31, 1995. A summary of the activity in the allowance for loan losses is as follows: (dollars in thousands) 1995 1994 1993 ================================================================================ Balance a the beginning of the year $ 1,073 $ 943 $ 821 Provisions charged to expense 0 10 200 Loans charged off (10) (12) (98) Recoveries on loans previously charged off 10 132 20 - ------------------------------------------------------------------------------- Balance at the end of the year $ 1,073 $ 1,073 $ 943 ================================================================================ The allowance for loan losses for Federal income tax purposes amounted to $758,000 and $638,000 at December 31, 1995 and 1994, which is the maximum allowable. The Bank's policy is to grant commercial, mortgage, and installment loans to New Jersey residents and businesses within its local 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 personal guarantees are required for virtually all loans. NOTE 5 BANK PREMISES AND EQUIPMENT A summary of the Corporation's premises and equipment at December 31, 1995 and 1994 follows: (dollars in thousands) 1995 1994 ========================================================================== Land $ 1,463 $ 1,079 Buildings 4,965 4,947 Furniture, fixtures and equipment 4,201 3,907 Leasehold improvements 288 286 ========================================================================== 10,917 10,219 Less accumulated depreciation and amortization 3,455 2,776 - -------------------------------------------------------------------------- $ 7,462 $ 7,443 ========================================================================== 39 [CENTER BANCORP INC. LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6 PENSION AND BENEFITS The Corporation maintains a non-contributory pension plan for substantially all 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 new non-qualified retirement plan which is designed to supplement the pension plan for key employees. The following table sets forth the funded status and amounts recognized in the consolidated statements of condition for the Corporation's pension plans at December 31, 1995 and 1994. (dollars in thousands) 1995 1994 ================================================================================ Actuarial present value of benefit obligations Vested $ 2,700 $ 2,299 Non-Vested 117 71 - -------------------------------------------------------------------------------- Accumulated benefit obligation 2,817 2,370 Effect of projected future compensation levels 865 1,191 - -------------------------------------------------------------------------------- Projected benefit obligation 3,682 3,561 Plan assets at fair value 3,318 3,100 - -------------------------------------------------------------------------------- Assets less than projected benefit obligation (364) (461) Unrecognized net asset (25) (28) Unamortized Prior Service Cost 184 -- Deferred gain (574) (192) - -------------------------------------------------------------------------------- Accrued expense $ (779) $ (681) ================================================================================ The net periodic pension cost for 1995, 1994 and 1993 include the following components. (dollars in thousands) 1995 1994 1993 ================================================================================ Service cost $ 208 $ 187 $ 191 Interest 251 226 223 Actual return on plan assets (275) (196) (220) Net amortization and deferral. 21 (11) 21 - -------------------------------------------------------------------------------- Net periodic pension expense $ 205 $ 206 $ 215 ================================================================================ 40 [UNION CENTER LOGO] NOTE 6 PENSIONS SND BENEFITS (continued) The following table presents the assumptions used to calculate the projected benefit obligation and pension expense in each of the last three years. 1995 1994 1993 =============================================================================== Discount rate 7.50% 8.00% 8.00% Rate of compensation increase 6.50% 6.75% 7.75% Expected long-term rate of return on plan assets 8.00% 7.00% 7.00% =============================================================================== 401K BENEFIT PLAN During 1994, the Corporation established 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. The plan was effective January 1, 1995. Employer contributions made in 1994 amounted to $0. Employer contributions amounted to $43,050 in 1995. STOCK OPTION PLANS The Stock Option Plans permit Center Bancorp common stock to be issued to key employees and directors of the company and its subsidiaries. The options granted under the Plans are intended to be either Incentive Stock Options or Non-Qualified Options. 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 par value of the shares are credited to surplus. 41 [CENTER BANCORP LOGO] Notes to Consolidated Financial Statements (continued) NOTE 6 PENSIONS AND BENEFITS (continued) Changes in options outstanding during the past three years were as follows:
Exercise Price Range Stock Option Plan Shares Per Share =============================================================================== Outstanding, December 31, 1992 (4,200 shares exercisable) 4,200 $ 11.90 to $ 11.90 Granted during 1993 63,000 29.28 to 29.28 Exercised during 1993 0 -- to -- Expired or cancelled during 1993 0 -- to -- - ------------------------------------------------------------------------------- Outstanding, December 31, 1993, (4,200 shares exercisable) 67,200 11.90 to 29.28 Granted during 1994 12,600 29.28 to 29.28 Exercised during 1994 (4,200) 11.90 to 11.90 Expired or cancelled during 1994 (525) 29.28 to 29.28 - ------------------------------------------------------------------------------- Outstanding, December 31, 1994, (23,415 shares exercisable) 75,075 29.28 to 29.28 Granted during 1995 -- -- to -- Exercised during 1995 -- -- to -- Expired or cancelled during 1995 (6,825) 29.28 to 29.28 - ------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 1995 (34,020 shares exercisable) 68,250 $ 29.28 to $ 29.28 ===============================================================================
NOTE 7 INCOME TAXES The current and deferred amounts of income tax expense for the years ended December 31, 1995, 1994 and 1993 are as follows:
(dollars in thousands) 1995 1994 1993 ============================================================================== CURRENT: Federal $1,273 $ 1,241 $ 1,117 State 125 68 57 - ------------------------------------------------------------------------------ 1,398 1,309 1,174 DEFERRED: Federal 118 125 (160) - ------------------------------------------------------------------------------- Income tax expense from continuing operations 1,516 1,434 1,014 ===============================================================================
42 [UNION CENTER LOGO] NOTE 7 INCOME TAXES (continued) 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: (dollars in thousands) 1995 1994 1993 ============================================================================== Income before income tax expense $5,556 $5,611 $4,815 Federal statutory rate 34% 34% 34% - ------------------------------------------------------------------------------ Computed "expected" Federal income tax expense 1,889 1,907 1,637 State tax net of Federal tax benefit 82 45 38 Tax-exempt interest and dividends (429) (526) (669) Decrease in valuation allowance 0 (22) 0 Other, net (26) 30 8 - ------------------------------------------------------------------------------ Income tax expense 1,516 $1,434 $1,014 ============================================================================== The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 1995 and 1994 are presented below. (dollars in thousands) 1995 1994 ============================================================================== Deferred tax assets: Allowance for loan losses $126 $174 Pension Expense 295 262 Deferred fee income-Mortgages 61 67 Unrealized loss on securities available for sale 0 345 - ------------------------------------------------------------------------------ Total gross deferred tax asset 482 848 Valuation allowance (58) (58) - ------------------------------------------------------------------------------ Net deferred tax asset $424 $790 - ------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation $141 $ 81 Market discount accretion 199 163 Premium amortization 0 43 Deferred fee expense-Mortages 126 82 Unrealized gains on securities available for sale 277 0 - ------------------------------------------------------------------------------ Total gross deferred tax liabilities 743 369 - ------------------------------------------------------------------------------ Net deferred tax asset (liability) $(319) $421 ============================================================================== 43 [CENTER BANCORP LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7 INCOME TAXES (continued) 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 Company will realize the benefit of the net deductible temporary differences existing at December 31, 1995 and 1994, 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, 1995 and 1994 was $58,000 and $58,000 respectively. NOTE 8 (unaudited) QUARTERLY FINANCIAL INFORMATION CENTER BANCORP, INC.
FISCAL 1995 (dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - ------------------------------------------------------------------------------------------------------------------------ Total interest income $ 5,716 $ 5,474 $ 5,353 $ 5,206 Total interest expense 2,297 2,206 2,214 2,070 Net interest income 3,419 3,268 3,139 3,136 Provision for loan losses 0 0 0 0 Other income 175 150 248 159 Other expense 2,210 1,791 2,164 1,973 Income before income taxes 1,384 1,627 1,223 1,322 Net Income 985 1,141 914 1,000 Earnings per share $ 0.66 $ 0.77 $ 0.62 $ 0.68 Weighted average common shares outstanding 1,478,357 1,477,504 1,476,557 1,475,671 ======================================================================================================================== FISCAL 1994 (dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - ------------------------------------------------------------------------------------------------------------------------ Total interest income $ 5,036 $ 4,856 $ 4,583 $ 4,508 Total interest expense 1,653 1,527 1,393 1,341 Net interest income 3,383 3,329 3,190 3,167 Provision for loan losses 0 0 0 10 Other income 162 163 177 166 Other expense 2,136 1,936 2,064 1,980 Income before income taxes 1,409 1,556 1,303 1,343 Net Income 989 1,135 1,012 1,041 Earnings per share $ 0.67 $ 0.77 $ 0.69 $ 0.70 Weighted average common shares outstanding 1,474,264 1,473,413 1,472,032 1,472,032 ========================================================================================================================
44 [UNION CENTER LOGO] NOTE9 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 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. Under SFAS 107, the fair value of deposit with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1995 and 1994. 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 contract amounts. Short-term borrowings that mature within six months have fair values equal to their carrying value. 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 liabilities, 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. 45 [CENTER BANCORP INC. LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The estimated fair value of the Corporation's financial instruments are as follows:
December 31, - -------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 ==================================================================================================================== CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ 30,172 $ 30,172 $ 18,305 $ 18,305 Investments 209,692 211,111 207,483 201,891 Net loans 96,497 94,497 87,732 83,167 FINANCIAL LIABILITIES: Noninterest-bearing deposits $ 60,635 $ 60,635 $ 56,872 $ 56,872 Interest-Bearing deposits 235,031 235,031 233,304 233,304 Federal funds purchased and securities sold under agreement to repurchase 22,326 22,326 9,745 9,745 ====================================================================================================================
NOTE 10 PARENT COMPANY 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. Dividends payable by the Corporation are unrestricted, although 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 11). Condensed financial statements of the Parent Company only follow: CONDENSED STATEMENTS OF CONDITION For years ended December 31, - -------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 ================================================================================ ASSETS Cash and cash equivalents $ 890 $ 629 Investment in subsidiary 27,357 24,074 - -------------------------------------------------------------------------------- $28,247 $24,703 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 567 $ 492 Stockholders' equity 27,679 24,211 - -------------------------------------------------------------------------------- $28,246 $24,703 ================================================================================ 46 [UNION CENTER LOGO] NOTE 10 PARENT COMPANY ONLY FINANCIAL STATEMENTS (continued) CONDENSED STATEMENT OF INCOME
For years ended December 31, - ----------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 =============================================================================================== Income Dividend income from subsidiary $ 1,775 $ 1,727 $ 1,698 Management fees 48 45 61 Other 0 3 0 - ----------------------------------------------------------------------------------------------- 1,823 1,775 1,759 Expenses 95 140 126 - ----------------------------------------------------------------------------------------------- Net income before equity in earnings of subsidiary 1,728 1,635 1,633 Equity in earnings of subsidiary 2,312 2,542 2,168 - ----------------------------------------------------------------------------------------------- Net Income $ 4,040 $ 4, 177 $ 3,801 =============================================================================================== CONDENSED STATEMENTS OF CASH FLOWS For years ended December 31, - ----------------------------------------------------------------------------------------------- (dollars in thousands) 1995 1994 1993 =============================================================================================== Operating Activities: Net income $ 4,040 $ 4,177 $ 3,801 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiary (2,312) (2,542) (2,168) Other, net 76 (260) 33 - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,804 1,375 1,666 - ----------------------------------------------------------------------------------------------- Financing Activities: Cash Dividends (1,775) (1,730) (1,623) Proceeds from exercise of stock options 0 0 50 Proceeds from issuance of common stock 232 116 0 - ----------------------------------------------------------------------------------------------- Net cash used in financing activities (1,543) (1,614) (1,573) - ----------------------------------------------------------------------------------------------- Increase (decrease)in cash 261 (239) 93 Cash at the beginning of year 629 868 775 - ----------------------------------------------------------------------------------------------- Cash at the end of year $ 890 $ 629 $ 868 ===============================================================================================
NOTE 11 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 its net profits for that year combined with its retained profits for the two preceding years. At December 31, 1995, $7,022,000 was available for the payment of dividends. 47 [CENTER BANCORP INC. LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 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 $20,467,000 and $20,538,000 and standby letters of credit totaling $9,439,000 and $8,128,000 at December 31, 1995 and 1994, respectively, which are not reflected in the accompanying consolidated financial statements. 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. The Corporation is subject to claims and lawsuits which arise primarily 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. NOTE 13 SUBSEQUENT EVENT (unaudited) On February 14, 1996, the Corporation entered into a letter of intent to acquire the $74 million Lehigh Savings Bank, SLA (Lehigh) and its three branches located in Union County, New Jersey at a cost of approximately $6 million. The acquisition will be accounted for under the purchase method of accounting, and is subject to regulatory approval. As a result of the acquisition the excess of cost over fair market value of tangible assets acquired will be recorded as goodwill. 48 [UNION CENTER LOGO] KPMG Peat Marwick LLP Certified Public Accountants INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Center Bancorp Inc.: We have audited the accompanying consolidated statements of condition of Center Bancorp, Inc. and subsidiary (the Corporation) as of December 31, 1995 and 1994, 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, 1995. 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 the Corporation as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in 1994 and Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" in 1993. KPMG PEAT MARWICK LLP Short Hills, New Jersey January 31, 1996 EX-23.1 7 CONSENT OF ACCOUNTANTS 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 on Form S-3 of Center Bancorp Inc. of our report dated January 31, 1996, relating to the consolidated statements of condition of Center Bancorp Inc. as of December 31, 1995 and 1994 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, 1995, which report is incorporated by reference in the December 31, 1995 Annual Report on Form 10-K of Center Bancorp Inc. Our report refers to a change in accounting for certain investments in debt and equity securities in 1994 and accounting for income taxes in 1993. /s/ KPMG PEAT MARWICK LLP ---------------------------- KPMG Peat Marwick LLP Short Hills, New Jersey March 25, 1996 EX-27.1 8 FDS FOR FIRST QUARTER 10-Q
9 1,000 YEAR DEC-31-1995 DEC-31-1995 30,172 235,031 16,000 0 53,662 156,030 157,449 97,570 1,073 347,777 295,666 22,326 2,106 0 4,199 0 0 23,480 347,777 7,526 13,930 293 21,749 8,685 102 12,962 0 49 8,138 5,556 5,556 0 0 4,040 2.73 2.73 6.92 0 48 0 0 1,073 10 10 1,073 675 0 397
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