-----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, G/HTNDzyEcQUuFxJhqGphzUEQCtnJKU0PU9PZYIYuKRkurjy19mOhspM8UFx80YS dRD1MeRq1OfImFftjIoqhA== 0000950116-99-000692.txt : 19990408 0000950116-99-000692.hdr.sgml : 19990408 ACCESSION NUMBER: 0000950116-99-000692 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990407 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/A SEC ACT: SEC FILE NUMBER: 000-11486 FILM NUMBER: 99588979 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/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 Form 10-K/A1 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. for the transition period from ____ to ____. Commission File Number 2-81353 CENTER BANCORP INC. - -------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) New Jersey 52-1273725 - -------------------------------------------------------------------------------- (State or other jurisdiction of 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 5-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. _X_ Aggregate Market value of voting stock held by non-affiliates based on the average of Bid and Asked prices on February 26, 1999 was approximately $57.3 million Shares outstanding on February 26, 1999 - --------------------------------------- Common stock no par value - 3,582,841 shares Parts of Form 10-K in which Documents Incorporated by reference document is incorporated - ----------------------------------- ------------------------ Definitive proxy statement dated March 12, 1999, in connection with the 1999 Annual Stockholders Meeting filed with the Commission pursuant to Regulation 14A............................................ Part III Annual Report to Stockholders for the fiscal year ended December 31, 1998.............................. Part I and Part II 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 at December 31, 1998, and 1997 34 --------------------------------------------------------------------------------------------------- Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 35 --------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Stockholders' Equity for the years ended 36 December 31, 1998, 1997 and 1996 --------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 37 --------------------------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 38- 53 --------------------------------------------------------------------------------------------------- Report of Independent Auditors 54 ---------------------------------------------------------------------------------------------------
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 3.2 Bylaws of the Registrant 10.1 Employment agreement between the Registrant and Donald Bennetti, dated January 1, 1996, is incorporated by reference to exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.2 Employment agreement between the Registrant and John J. Davis is incorporated by reference to exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.3 The Registrant's Employee Stock Option Plan is incorporated by reference to exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.4 The Registrant's Outside Director Stock Option Plan is incorporated by reference to exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.5 Supplemental Executive Retirement Plans ("SERPS") are incorporated by reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.6 Executive Split Dollar Life Insurance Plan is incorporated by reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.7 Employment agreement between the Registrant and Anthony C. Weagley, dated as of January 1, 1996 is incorporated by reference to exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 7 April 99 Center Bancorp Inc. Form 10-K/A1 10.8 Agreement and Plan of Merger, by and between the Registrant and Lehigh Savings Bank, SLA., dated as of February 14, 1996, as amended is incorporated by reference to exhibit 2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 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, SLA is incorporated by reference to exhibit 10.2 of the Registrant's for 10-Q for the period ended March 31, 1996. 10.10 Directors' Retirement Plan 11.1 Statement regarding computation of per share earnings is omitted because the computation can be clearly determined from the material incorporated by reference in this Report. *13.1 Registrant's Annual Report to Shareholders for the year ended December 31, 1998 (parts not incorporated by reference are furnished for information purposes only and are not to be deemed to be filed herewith.) 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 27.1 Financial Data Schedule - ----------- * Exhibit 13.1 is filed with this amendment to Form 10-K. All other exhibits were previously filed with the initial 10-K filing or incorporated by reference. B. Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the fourth quarter of 1998. 7 April 99 Center Bancorp Inc. Form 10-K/A1 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 amendment to its 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 April 7, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to Center Bancorp Inc.'s report has been signed below by the following persons on behalf of the Registrant, in the capacities described below and on the date indicated above: /s/ CHARLES P. WOODWARD /s/ HUGO BARTH, III - ------------------------------------ ------------------------------------- Charles P. Woodward, Hugo Barth, III Director and Chairman of the Board Director /s/ ROBERT L. BISCHOFF /s/ ALEXANDER BOL - ------------------------------------ ------------------------------------- Robert L. Bischoff Alexander Bol Director Director /s/ BRENDA CURTIS /s/ DONALD G. KEIN - ------------------------------------ ------------------------------------- Brenda Curtis Donald G. Kein Director Director /s/ JOHN J. DAVIS /s/ HERBERT SCHILLER - ------------------------------------ ------------------------------------- John J. Davis Herbert Schiller President and Chief Executive Officer Director and Director /s/ PAUL LOMAKIN, JR. /s/ STAN R. SOMMER - ------------------------------------ ------------------------------------- Paul Lomakin, Jr. Stan R. Sommer Director Director /s/ WILLIAM THOMPSON /s/ ANTHONY C. WEAGLEY - ------------------------------------ ------------------------------------- William Thompson Anthony C. Weagley Director Vice President & Treasurer (Chief Accounting and Financial Officer) 7 April 99 Center Bancorp Inc. Form 10-K/A1 EXHIBIT INDEX 3.1 Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 10.1 Employment agreement between the Registrant and Donald Bennetti, dated January 1, 1996, is incorporated by reference to exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.2 Employment agreement between the Registrant and John J. Davis is incorporated by reference to exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.3 The Registrant's Employee Stock Option Plan is incorporated by reference to exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.4 The Registrant's Outside Director Stock Option Plan is incorporated by reference to exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.5 Supplemental Executive Retirement Plans ("SERPS") are incorporated by reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.6 Executive Split Dollar Life Insurance Plan is incorporated by reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.7 Employment agreement between the Registrant and Anthony C. Weagley, dated as of January 1, 1996 is incorporated by reference to exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.8 Agreement and Plan of Merger, by and between the Registrant and Lehigh Savings Bank, SLA., dated as of February 14, 1996, as amended is incorporated by reference to exhibit 2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 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, SLA is incorporated by reference to exhibit 10.2 of the Registrant's for 10-Q for the period ended March 31, 1996. 10.10 Directors' Retirement Plan 11.1 Statement regarding computation of per share earnings is omitted because the computation can be clearly determined from the material incorporated by reference in this Report. *13.1 Registrant's Annual Report to Shareholders for the year ended December 31, 1998 (parts not incorporated by reference are furnished for information purposes only and are not to be deemed to be filed herewith.) 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 27.1 Financial Data Schedule - ----------- * Exhibit 13.1 is filed with this amendment to Form 10-K. All other exhibits were previously filed with the initial 10-K filing or incorporated by reference. 7 April 99 Center Bancorp Inc. Form 10-K/A1 EX-13 2 EXHIBIT 13.1 Financial Highlights
For the years ended December 31, -------------------------------- Percent (Dollars in thousands, except per share data) 1998 1997 Change - ------------------------------------------------------------------------------------------------------- EARNINGS Net interest income $ 17,113 $ 16,219 5.51% Provision for loan loasses 120 0 100.00 Other income 971 1,111 -12.60 Other Expenses 11,651 10,596 9.96 Net Income 4,172 4,511 -7.51 Cash Dividends Declared $ 2,023 $ 1,863 8.59 - ------------------------------------------------------------------------------------------------------ PER SHARE DATA Net Income Basic $ 1.17 $ 1.28 8.59% Diluted 1.16 1.27 8.66 Cash Dividends 0.57 0.53 7.55 Book Value 10.24 9.44 8.47 Tangible Book Value $ 9.39 $ 8.48 10.73 - ------------------------------------------------------------------------------------------------------- AT YEAR END Bid Ask Bid Ask Market Value Per Common Share $16.75 $17.375 $15.67 $16.33 - ------------------------------------------------------------------------------------------------------- AT YEAR END Investment Securities $ 287,966 $ 298,298 -3.46% Loans 150,099 132,424 13.35 Assets 470,134 473,112 -0.63 Deposits 377,167 436,010 -13.50 Stockholders' Equity $ 36,631 $ 33,422 9.60 Total Shares Outstanding 3,578,149 3,542,171 1.02 FINANCIAL RATIOS Return on Average Assets 0.88% 0.94% - ------------------------------------------------------------------------------------------------------- Return on Average Stockholders' Equity 11.75% 14.16% Return on Tangible Average Stockholders' Equity 12.93% 15.92% - ------------------------------------------------------------------------------------------------------- Cash Dividends Declared as a Percent of Net Income 48.47% 41.30% - ------------------------------------------------------------------------------------------------------- Average Stockholders' Equity as a Percent of Average Total Assets 7.49% 6.65% Tangible Average Stockholders' Equity as a Percent of Average Total Assets 6.81% 5.92% - ------------------------------------------------------------------------------------------------------- Stockholders' Equity as a Percent of Total Assets 7.79% 7.06% Tangible Stockholders' Equity as a Percent of Average Total Assets 7.09% 6.27% - ------------------------------------------------------------------------------------------------------- Average Risk-Based Tier I Capital Ratio 15.03% 15.48% Average Risk-Based Tier I and Tier II Capital 15.64% 16.15% Tier I Leverage Ratio 6.93% 6.19% - -------------------------------------------------------------------------------------------------------
All share and per share amounts have been restated to reflect the 3-for-2 stock split distributed in May of 1998 and the 5% stock dividend distributed in May of 1997. 1 [LOGO] Summary of Selected Statistical Information and Financial Data
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Summary of Income Interest income $ 30,686 $ 30,706 $ 26,430 $ 21,749 $ 18,983 Interest expense 13,573 14,487 11,586 8,787 5,914 Net interest income 17,113 16,219 14,844 12,962 13,069 Provision (credit) for loan losses 120 0 (132) 0 10 Net interest income after provision (credit) for loan losses 16,993 16,219 14,976 12,962 13,059 Other income 971 1,111 727 732 668 Other expense 11,651 10,596 9,910 8,138 8,116 Income before income tax expense 6,313 6,734 5,793 5,556 5,611 Income tax expense 2,141 2,223 1,636 1,516 1,434 Net income $ 4,172 $ 4,511 $ 4,157 $ 4,040 $ 4,177 - --------------------------------------------------------------------------------------------------------------------- Statement of Financial Condition Data Investments $ 287,966 $ 298,298 $ 280,123 $ 209,692 $ 207,483 Total loans 150,099 132,424 117,830 97,570 88,805 Total assets 470,134 473,112 459,218 347,777 325,113 Deposits 377,167 436,010 426,654 295,666 290,175 Stockholders' equity $ 36,631 $ 33,422 $ 30,213 $ 27,679 $ 24,211 - --------------------------------------------------------------------------------------------------------------------- Dividends Cash dividends $ 2,023 $ 1,863 $ 1,787 $ 1,775 $ 1,730 Dividend payout ratio 48% 41% 43% 44% 41% - --------------------------------------------------------------------------------------------------------------------- Cash Dividends Per Share Cash dividends $ 0.57 $ 0.53 $ 0.51 $ 0.51 $ 0.49 - --------------------------------------------------------------------------------------------------------------------- Earnings Per Share Basic $ 1.17 $ 1.28 $ 1.18 $ 1.16 $ 1.20 Diluted $ 1.16 $ 1.27 $ 1.18 $ 1.16 $ 1.20 - --------------------------------------------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding Basic 3,563,312 3,534,099 3,513,756 3,493,870 3,479,810 Diluted 3,597,514 3,560,225 3,522,579 3,493,870 3,479,810 - --------------------------------------------------------------------------------------------------------------------- Operating Ratios Return on average assets 0.88% 0.94% 1.00% 1.15% 1.27% Return on tangible average equity 12.93% 15.92% 15.21% 15.32% 17.59% - --------------------------------------------------------------------------------------------------------------------- Book Value Per Common Share $ 10.24 $ 9.44 $ 8.57 $ 7.90 $ 6.95 Tangible book value $ 9.39 $ 8.48 $ 7.53 $ 7.90 $ 6.95 - --------------------------------------------------------------------------------------------------------------------- Non-Financial Information Common stockholders 606 609 633 629 598 Staff--Full time equivalent 153 140 151 132 132 - ---------------------------------------------------------------------------------------------------------------------
Footnote: All share and per share amounts have been restated to reflect the three-for-two split distributed on May 28, 1998, the 5% stock dividend distributed in May 1997, and all prior stock dividends and splits. 15 [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 1998. Center Bancorp's performance for 1998 was highlighted by loan growth, principally in the commercial, mortgage and consumer loan portfolios, with consistent asset quality. Commensurate with the growth in the loan portfolio, the Corporation recorded a $120,000 provision for loan losses during 1998. 1998 represented another year of solid earnings. As a result of consistent earnings and capital growth, dividends were increased and resulted in a 48 percent dividend payout ratio and the Board of Directors declared a three-for-two stock split. The stock split was distributed in May of 1998, and constituted the fifth time in the last six years that the Corporation has either paid a stock dividend or declared a stock split. Net income for the year ended December 31, 1998, amounted to $4,172,000 as compared to $4,511,000 and $4,157,000 earned in 1997 and 1996, respectively. Basic earnings per share amounted to $1.17 as compared to $1.28 and $1.18 earned in 1997 and 1996, respectively. Diluted earnings per share was $1.16 for 1998 compared to $1.27 in 1997 and $1.18 in 1996. These figures have been restated to reflect the three-for-two stock split distributed in 1998, 5% stock dividend in 1997, and the three-for-two stock split in 1996. Earnings performance for 1998 reflected increased net interest income, offset by an increase in operating expenses. These expenses were a direct result of the growth and expansion of Union Center National Bank (the "Bank"). The increased net interest income was primarily a result of a change in the asset mix and more importantly a change in the funding mix coupled with lower rates paid on deposit and borrowings. The Corporation's total assets at December 31, 1998 amounted to $470.1 million, decreasing $3.0 million or 0.63 percent from December 1997 levels. The return on average assets was 0.88 percent in 1998, as compared with 0.94 percent and 1.00 percent in 1997 and 1996, respectively. A continuing key element of the Corporation's consistent performance is its strong capital base. The Corporation's risk-based capital ratios at December 31, 1998 were 15.0 percent for Tier I capital and 15.6 percent for total risk-based capital. These ratios substantially exceed the minimum of 4 percent for Tier I capital and 8 percent for total capital under regulatory guidelines. From a performance viewpoint, return on tangible average shareholder's equity was 12.9 percent in 1998, compared with 15.9 percent for 1997 and 15.2 percent in 1996. The following sections discuss the Corporation's Results of Operations, Asset and Liability Management, Liquidity and Capital Resources. RESULTS OF OPERATIONS The most significant component of Center Bancorp's earnings is net interest income, which is the difference between the interest earned on the portfolio of earning assets (principally investments and loans) and the interest paid for deposits and short-term borrowings which support these assets. Net interest income is directly affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities which support those assets, as well as changes in the rates earned and paid. Net interest income is presented in this financial review on a fully tax-equivalent basis, whereby 16 tax-exempt income (primarily interest earned on various obligations of state and political subdivisions) is adjusted by the amount of income tax which would have been paid had the assets been invested in taxable issues. As a result, the net interest income data presented in this financial review differ from the Corporation's net interest income components of the consolidated financial statements presented elsewhere in this report. The following table presents the components of net interest income (on a tax-equivalent basis) for the past three years.
1998 - ----------------------------------------------------------------------------------- Increase (Decrease) From Percent (dollars in thousands) Amount Prior Year Change Amount - ----------------------------------------------------------------------------------- Interest Income: Investments $ 19,212 $ (966) ( 4.8) $ 20,178 Loans, including fees 10,924 944 9.5 9,980 Federal funds sold and securities purchased under agreement to resell 550 2 .4 548 - ----------------------------------------------------------------------------------- Total interest income 30,686 (20) ( .1) 30,706 - ----------------------------------------------------------------------------------- Interest expense: Certificates $100,000 or more 4,301 (1,535) (26.3) 5,836 Deposits 7,850 (184) ( 2.3) 8,034 Borrowings 1,422 805 130.5 617 - ----------------------------------------------------------------------------------- Total interest expense 13,573 (914) ( 6.3) 14,487 - ----------------------------------------------------------------------------------- Net interest income* 17,113 894 5.5 16,219 Tax-equivalent adjustment 361 (120) (25.0) 481 - ----------------------------------------------------------------------------------- Net interest income on a fully tax-equivalent basis $ 17,474 $ 774 4.6 $ 16,700 - ----------------------------------------------------------------------------------- 1997 1996 - ----------------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) From Percent From Percent (dollars in thousands) Prior Year Change Amount Prior Year Change - ------------------------------------------------------------------------------------------------- Interest Income: Investments $ 2,854 16.4 $ 17,324 $ 4,043 30.4 Loans, including fees 1,355 15.7 8,625 1,099 14.6 Federal funds sold and securities purchased under agreement to resell 67 13.9 481 (461) (48.9) - ------------------------------------------------------------------------------------------------- Total interest income 4,276 16.2 26,430 4,681 21.5 - ------------------------------------------------------------------------------------------------- Interest expense: Certificates $100,000 or more 1,723 41.9 4,113 1,349 48.8 Deposits 937 13.2 7,097 1,176 19.9 Borrowings 241 64.1 376 274 268.6 - ------------------------------------------------------------------------------------------------- Total interest expense 2,901 25.0 11,586 2,799 31.9 - ------------------------------------------------------------------------------------------------- Net interest income* 1,375 9.3 14,844 1,882 14.5 Tax-equivalent adjustment (97) (16.8) 578 (112) (16.2) - ------------------------------------------------------------------------------------------------- Net interest income on a fully tax-equivalent basis $ 1,278 8.3 $ 15,422 $ 1,770 13.0 - -------------------------------------------------------------------------------------------------
* Before the provision (credit) for loan losses. NOTE: The tax-equivalent adjustment was computed based on an assumed statutory Federal income tax rate of 34 percent. Adjustments were made for interest earned on securities of state and political subdivisions. NET INTEREST INCOME Net interest income on a fully tax-equivalent basis increased $774,000 or 4.6 percent to approximately $17.5 million during 1998 from approximately $16.7 million for 1997. The net interest margin increased from 3.75 percent to 3.92 percent for 1998 due to lower cost of funds reflecting the decrease in short-term interest rates that prevailed throughout most of 1998. Average interest-earning assets for 1998 amounted to $445.3 million compared to $445.2 million for 1997. Average interest-bearing liabilities decreased $9.7 million during 1998 to $361.9 million from $371.6 million in 1997. Net average interest-earning assets increased from $73.6 million in 1997 to $83.4 in 1998. The 1998 change in average balances was primarily due to decreased volumes of interest-bearing liabilities, primarily certificates of deposit greater than $100,000. The average yield on interest-earning assets decreased from 7.01 percent in 1997 to 6.97 percent in 1998 while there was a greater decrease in the average cost of interest-bearing liabilities (3.90 percent in 1997 versus 3.75 percent in 1998), reflecting a decrease in short-term interest rates that prevailed through most of 1998. The factors underlying the year-to-year changes in net interest income are reflected in the tables appearing below and on page 18, both of which have been presented on a tax-equivalent basis (assuming a 34 percent tax rate). The table on page 33 (Average Statements of Condition with Interest and Average Rates) shows the Corporation's consolidated average balance of assets, liabilities and stockholders' equity, the amount of income produced from interest-earning assets and the amount of 17 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS expense resulting from interest-bearing liabilities, and net interest income as a percentage of average interest-earning assets. The table presented below (Analysis of Variance in Net Interest Income Due to Volume and Rates) quantifies the impact on net interest income resulting from changes in average balances and average rates over the past three years. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category. ANALYSIS OF VARIANCE IN NET INTEREST INCOME DUE TO VOLUME AND RATES
1998/1997 1997/1996 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 $ (573) $(126) $ (699) $ 2,984 $ 21 $ 3,005 Non-taxable (345) (42) (387) (278) 26 (252) Federal funds sold and securities purchased under agreement to resell 7 (5) 2 931 (864) 67 Loans, net of unearned discounts 1,062 (118) 944 1,399 (40) 1,359 - -------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 151 (291) (140) 5,036 (857) 4,179 - -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Money market deposits 97 117 214 (130) (140) (270) Savings deposits (124) (171) (295) 68 (11) 57 Time deposits (1,306) (259) (1,565) 2,684 203 2,887 Other interest-bearing deposits (47) (26) (73) (46) 32 (14) Borrowings 938 (133) 805 241 0 241 - -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (442) (472) (914) 2,817 84 2,901 - -------------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 593 $ 181 $ 774 $ 2,219 $ (941) $ 1,278 - --------------------------------------------------------------------------------------------------------------------------
Interest income (tax-equivalent) decreased by $140,000 from 1997 to 1998 and increased by $4.2 million from 1996 to 1997. The primary factor in the modest decline in interest income during 1998 was the relatively unchanged level of earning-assets coupled with lower average rates earned on interest-earning assets. The Corporation's loan portfolio increased on average by $13.5 million, primarily as a result of increased volumes of commercial real estate, commercial and home equity loans. This increase was primarily achieved through increased business development. The loan portfolio (traditionally the highest yielding type of interest-earning asset) represented 31.2 percent of the Corporation's interest-earning assets (on average) during 1998 as compared with 28.2 percent of such assets (on average) during 1997. The increased level of interest income generated from the loan portfolio in 1998 was due to increased volume, as the average yield on the Corporation's loans declined by 10 basis points. Investments contributed the most significant change in the earning-asset mix in 1998. The investment portfolio which decreased on average by $13.5 million provided the funding for loan 18 growth. Within the investment portfolio, the average volume in 1998 decreased in taxable securities by $8.7 million and in the non-taxable portfolio by $4.8 million compared to 1997. The average yield on the investment portfolio declined by 6 basis points during 1998. Interest expense decreased during 1998, primarily as a result of the decreased deposit volumes, and an increase in lower costing short-term borrowings bolstered by lower rates paid. For the year ended December 31, 1998, interest expense decreased by $914,000 or 6.3 percent as compared with the year ended December 31, 1997. The average cost of funds decreased by 15 basis points, reflecting the decline in interest rates, and changes in the liability mix, (i.e., increased volumes of less costly interest-bearing time deposits and short-term borrowings). During 1997 interest expense increased $2.9 million or 25.0 percent as compared with the year ended December 31, 1996. This was primarily a result of higher average funding costs, as short-term interest rates moved higher throughout most of 1997. The resulting average cost of funds to the Corporation increased by 29 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 1997 and 1996, less expensive deposits such as checking, savings and money market accounts were replaced by more costly time deposits of $100,000 and over. Inflationary fears and the expanding economy pushed short-term interest rates up in 1997 and 1996. This in turn had effected the cost of funds associated with a number of the Corporation's funding products, including municipal deposits tied to market indices, "Jumbo" Certificates of Deposit, and short-term repurchase agreements. Deposit growth continued to be impacted by the depositors' desire for higher-yielding investment alternatives, such as mutual funds, equity securities, tax-free instruments, and a variety of insurance products. As interest rates remained high in the short term market in 1996, and into 1997, depositors shifted funds from lower yielding savings and money market accounts into higher yielding certificates of deposit. This shift continued throughout 1997. The impact of this change in the deposit mix, coupled with the higher rates at the short end of the yield curve, gave rise to the net change in the cost of funds for 1997. For the three year period ended December 31, 1998, the Corporation's net interest yield on a tax-equivalent basis (i.e., net interest income on a tax-equivalent basis as a percent of average interest-earning assets) amounted to 3.92 percent in 1998, 3.75 percent, and 4.01 percent for 1997 and 1996, respectively. The declines noted reflected a narrowing of spreads between yields earned on loans and investments and rates paid for supporting funds. There was a favorable change in the mix of interest-earning assets, primarily the increased loan volumes. However, this was not sufficient to offset the effects of the change in the mix of interest-bearing liabilities to more costly funding. The contribution of noninterest-bearing sources (i.e. the differential between the average rate paid on all sources of funds and the average rate paid on interest-bearing sources) increased approximately 6 basis points during 1998 from 64 basis points in 1997. During the comparable periods of 1997 and 1996 there was a increase of 4 basis points, from 60 basis points to 64 basis points. The Corporation's net interest rate spread (i.e., the average yield on average interest-earning assets, calculated on a tax-equivalent basis, minus the average rate paid on interest-bearing liabilities) rose to 3.22 percent in 1998 from 3.11 percent in 1997 and was 18 basis points less than the 3.40 percent in 1996. The increase in net interest spread during 1998 was primarily a result of the decreased cost of interest-bearing liabilities offset in part by a decline in rates earned on interest-bearing assets. 19 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS INVESTMENTS The average volume of investment securities decreased by $13.5 million in 1998 as compared to 1997. The tax-equivalent yield on investments decreased to 6.61 percent in 1998 from 6.67 percent in 1997. The stability in the yield on the investment portfolio in 1998 was achieved through equal or higher market rates on purchases made to replace similar yielding investments which had matured, were prepaid or were called. The impact of repricing activity on yields was lessened by a change in the mix of the portfolio and shorter investment maturities, resulting in stable spreads. Securities available-for-sale are a part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. At December 31, 1998, the total investment portfolio excluding overnight investments, was $288.0 million, or 65.7 percent of earning-assets, as compared to $298.3 million or 67.5 percent at December 31, 1997. The principal components of the investment portfolio are U.S. Government Treasury and Federal Agency securities. For additional information regarding the Corporation's investment portfolio, see Note 4 to the Consolidated Financial Statements. LOANS Loan growth during 1998 occurred in all categories of the loan portfolio. This growth occurred from the Corporation's marketing and business development programs and new product lines. The decline of yield in the loan portfolio was the result of a lower prime rate environment during the fourth quarter of 1998 coupled with a continued competitive rate structure to attract new loans. The effect of additions to the loan portfolio were lessened by continued re-financing activity and by the heightened competition for borrowers that exists in the lending markets. The Corporation's desire to continue growing this component of the earning-asset mix is reflected in its current business development plan and marketing plans, as well as its strategic plan. Analyzing the portfolio for the year ended December 31, 1998, average loan volume increased $13.5 million, while the portfolio yield decreased 10 basis points as compared with 1997. Total average loan volume increased to $139.0 million with an average yield of 7.86 percent, as compared to $125.5 million with an average yield of 7.96 percent for the year ended December 31, 1997. For additional information regarding loans, see Note 5 to the Consolidated Financial Statements. ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION The purpose of the allowance for loan losses is to absorb the impact of losses inherent in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by management to provide for potential credit losses based upon a periodic evaluation of the risk characteristics of the loan portfolio. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions are also reviewed. At year-end 1998, the level of the 20 allowance was $1,326,000 as compared to a level of $1,269,000 at December 31, 1997. The Corporation had a provision to the allowance for loan losses of $120,000 in 1998, none in 1997 and a credit to earnings (through the provision for loan losses) in 1996 of $132,000. At December 31, 1998, the allowance for loan losses amounted to $1,326,000 or 0.88 percent of total loans. In management's view, the level of the allowance at December 31, 1998 is adequate to cover losses inherent in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examination. The allowance for loan losses as a percentage of total loans amounted to 0.88 percent, 0.96 percent and 1.10 percent at December 31, 1998, 1997 and 1996, respectively. During 1998 the Corporation did not experience any substantial problems within its loan portfolio. Net charge-offs were $63,000 in 1998, $24,000 in 1997 and $341,000 in 1996. The Corporation had non-accrual loans amounting to $41,000 at December 31, 1998, $27,000 at December 31, 1997, and $298,000 at December 31, 1996. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged-off. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Impaired loans consist of non-accrual loans and loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are collectively evaluated for impairment. The Corporation does not have any impaired loans at December 31, 1998 and 1997. The Corporation's statements herein regarding the adequacy of the allowance for loan losses may constitute forward looking statements under the Private Securities Reform Litigation Act of 1995. Actual results could indicate that the amount of the Corporation's allowance was inadequate. Factors that could cause the allowance to be inaccurate are the same factors that are analyzed by the Corporation in establishing the amount of the allowance. 21 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 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) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Average loans outstanding $ 138,967 $ 125,476 $ 107,897 $ 95,216 $ 72,752 - -------------------------------------------------------------------------------------------------------------------------- Total loans at end of period $ 150,099 $ 132,424 $ 117,830 $ 97,570 $ 88,805 - -------------------------------------------------------------------------------------------------------------------------- Analysis of the Allowance for Loan Losses Balance at the beginning of year $ 1,269 $ 1,293 $ 1,073 $ 1,073 $ 943 Charge-offs: Commercial 0 2 0 0 0 Real estate-mortgage 0 0 470 0 0 Installment loans 70 29 9 10 12 - -------------------------------------------------------------------------------------------------------------------------- Total charge-offs 70 31 479 10 12 - -------------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial 0 0 0 0 110 Real estate-mortgage 0 0 132 5 20 Installment loan 7 7 6 5 2 - -------------------------------------------------------------------------------------------------------------------------- Total recoveries 7 7 138 10 132 - -------------------------------------------------------------------------------------------------------------------------- Net charge offs: 63 24 341 0 (120) - -------------------------------------------------------------------------------------------------------------------------- Adjustments from acquisition of Lehigh 0 0 693 0 0 - -------------------------------------------------------------------------------------------------------------------------- Provision (credit) for loan losses 120 0 (132) 0 10 - -------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 1,326 $ 1,269 $ 1,293 $ 1,073 $ 1,073 - -------------------------------------------------------------------------------------------------------------------------- Ratio of net charge-offs during the year to average loans outstanding during the year 0.05% 0.02% 0.32% 0.00% (.16%) - -------------------------------------------------------------------------------------------------------------------------- Allowance for Loan Losses as a percentage of total loans at end of year 0.88% 0.96% 1.10% 1.10% 1.21% - --------------------------------------------------------------------------------------------------------------------------
The 1996 charge-off of $470,000 in real-estate mortgage loans occurred on loans acquired from Lehigh, which were subsequently sold. Similarly, the $132,000 loan loss recovery, in 1996, was on a loan that had been previously part of Lehigh's portfolio. ASSET QUALITY The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values, and to maintain an adequate allowance for loan losses at all times. These practices have protected the Corporation during economic downturns and periods of uncertainty. 22 It is generally the Corporation's policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loan's yield. The following table sets forth, as of the dates indicated, the amount of the Corporation's non-accrual loans, restructured loans, accruing loans past due 90 days or more and other real estate owned.
At December 31, - ------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------- Non-accrual loans $ 41 $ 27 $ 298 $ 0 $ 0 Restructured loans 0 0 0 0 0 Accruing loans past due 90 days or more 24 73 121 48 0 Other real estate owned 73 0 0 0 0 - ------------------------------------------------------------------------------------------- Total non-performing assets $ 138 $ 100 $ 419 $48 $ 0 - -------------------------------------------------------------------------------------------
At December 31, 1998, other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the table above. Other real estate owned (OREO) at December 31, 1998 consisted of a closed branch facility with a carrying value of approximately $73,000. 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, 1998.
Years Ended December 31, - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 % change 1997 1996 % change - -------------------------------------------------------------------------------------------------------------- Other income: Service charges, commissions and fees $ 748 $ 638 17.2 $ 638 $516 23.6 Other income 223 139 60.4 139 136 2.2 Gain on securities sold 0 334 (100.0) 334 75 345.3 - -------------------------------------------------------------------------------------------------------------- Total other noninterest-income $ 971 $ 1,111 ( 12.6) $ 1,111 $727 52.8 - --------------------------------------------------------------------------------------------------------------
Total other (noninterest) income, exclusive of gains on securities sold, reflects an increase of $194,000 or 25.0 percent in 1998. The primary component of the increase was the rise of fee revenue reflected in service charges, commissions and fees. This increase of $110,000 or 17.2 percent in such fees, was a result of increased fee income derived from ATM fees and deposit account activity. The increase in other income of $84,000 or 60.4 percent in 1998 over 1997 was attributable to gains on mortgage loans sold, letters of credit and other income. For the 1997 period, total other (noninterest) income, exclusive of gains on securities sold, reflects an increase of $125,000 or 19.2 percent. The primary component the increase was the result of increased ATM fees and increased fee income derived from checking account activity. During 1998 the Corporation did not sell any securities from its available-for-sale portfolio. However, during 1997 there were sales from the Corporation's available-for-sale portfolio with a net gain of approximately $334,000. These sales were made as part of the Corporation's investment strategy. In 1996 there were $75,000 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 structuring the Corporation's interest rate risk position. 23 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS 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, 1998.
Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 % change 1997 1996 % change - ---------------------------------------------------------------------------------------------------------------- Other noninterest expense: Salaries and employee benefits $ 6,005 $ 5,487 9.4 $ 5,487 $5,168 6.2 Occupancy expense, net 1,063 1,015 4.7 1,015 910 11.5 Premises and equipment expense 1,297 1,341 (3.3) 1,341 1,141 17.5 Stationery and printing expense 438 254 72.4 254 525 (51.6) Marketing & Advertising 446 337 32.3 337 422 (20.1) Other expenses 2,402 2,162 11.1 2,162 1,744 24.0 - ---------------------------------------------------------------------------------------------------------------- Total other noninterest expense $ 11,651 $ 10,596 10.0 $ 10,596 $9,910 6.9 - ----------------------------------------------------------------------------------------------------------------
Total other noninterest expense increased $1,055,000 or 10.0 percent in 1998 as compared to an increase of $686,000 or 6.9 percent from 1996 to 1997. The level of operating expenses during 1998 was unfavorably impacted by an increase in all categories except for premises and equipment expense. While management continues to emphasize expense control, the year to year increases in expense are attributable to the continued expansion of the Bank's facilities, continued investments in technology and the need to attract, develop and retain high-caliber employees. Salaries and employee benefits accounted for 51.5 percent of total other expense for 1998, as compared to 51.8 percent and 52.1 percent for the years 1997 and 1996, respectively. The Corporation's efficiency ratio (other expenses less non-recurring expenses as a percentage of net interest income on a tax-equivalent basis and other income exclusive of net securities gains/losses) was 61.8 percent, 56.8 percent and 57.4 percent respectively, for 1998, 1997 and 1996. The ratio of other expenses to average assets was 2.46 percent in 1998 compared to 2.21 percent in 1997 and 2.39 percent in 1996. The level of operating expenses during 1997 was favorably impacted by lower marketing and advertising expenses as well as the reduction of stationery and printing expenses. The level of operating expenses during 1996 was impacted by the acquisition of Lehigh and the opening of the Madison office. Salaries and employee benefits increased $518,000 or 9.4 percent in 1998, primarily the result of higher staffing levels, increased benefits costs and merit and promotional raises. In 1997 these expenses increased $319,000 primarily due to the increased expense arising from merit and promotional raises and higher benefit costs. Staffing levels overall increased to 153 at December 31, 1998 from 140 full-time equivalent employees at December 31, 1997. Employees' longevity has continued to play an important part. As of December 31, 1998, the Corporation's employees, excluding officers, have been employed by the Corporation for an average of 217.23 weeks or 4.18 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 $3.1 million, $3.4 million and $2.7 million in 1998, 1997 and 1996, respectively. Occupancy and bank premises and equipment expense increased by $4,000 or 0.2 percent in 1998 over 1997. This increase in 1998 expense reflects the ongoing impact on operating costs of expanded 24 facilities. The increase in such expenses of $305,000 or 14.9 percent in 1997 from 1996, reflect the increased costs associated with the expansion of new facilities, primarily the new corporate headquarters building, offset by operating overhead efficiencies achieved during the period. INCOME TAXES The Corporation's provision for income taxes increased from 1996 to 1997 primarily as a result of increased state taxes and a reduction of tax-exempt income and decreased from 1998 to 1997 primarily as a result of lower amounts of taxable income. The effective tax rates for the Corporation for the periods ended December 31, 1998, 1997 and 1996 were 33.9 percent, 33.0 percent and 28.2 percent, respectively. The effective tax rate continues to be less than the combined statutory Federal tax rate of 34 percent and the New Jersey State tax rate of 9 percent. The difference between the statutory and effective tax rates primarily reflects the tax-exempt status of interest income on obligations of states and political subdivisions and disallowed expense items for tax purposes, such as travel and entertainment expense, as well as amortization of goodwill. Tax-exempt interest income, on a tax-equivalent basis, decreased by $120,000 or 24.9 percent from 1997 to 1998, and declined by $252,000 or 14.8 percent from 1996 to 1997. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of this Statement is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of this Statement. This Statement should not be applied retroactively to financial statements of prior periods. The adoption of this statement by the Corporation is not expected to have a material effect on the financial statements of the Corporation. SFAS No. 134 On October 9, 1998 the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise". SFAS No. 134 changes the way mortgage banking firms account for certain securities and other interests they retain after securitizing mortgage loans that were held for sale. This statement is effective for fiscal quarters beginning after December 15, 1998. Early application is permitted. The adoption of this statement by the Corporation is not expected to have a material effect on the financial statements of the Corporation. 25 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS YEAR 2000 CENTURY DATE CHANGE In May 1997, the Federal Financial Institutions Examination Council (FFIEC) issued a joint statement updating its prior statement, issued in June of 1996, addressing the assessment and preparedness for the Year 2000 Century date change. Regulators have defined a formal year 2000 management process to assist the financial industry in dealing with this issue on a timely basis. The year 2000 century date change poses a significant challenge for financial institutions, as well as all businesses, because many computer programs and applications will cease to function normally as a result of the way that date fields have been programmed historically. This date problem exists because the two-digit representation of the year will be interpreted in many applications to mean the year 1900, not 2000, unless the date or program logic is changed. The result could be a number of errors, including incorrect mathematical calculations and lost system files. The Corporation has implemented a strategic plan designed to ensure that all information technology, including software and hardware, used in connection with the Corporation's business will handle date related data in a manner which will provide accurate results. The project objectives include assessment of the full effect of the Year 2000 issue, system development for testing and implementing solutions, determining how the Corporation will coordinate processing capabilities with its customer, vendor, and payment partners, and determining internal control requirements. As of December 1998, management has completed several phases of the plan, including identification, modification, and preliminary testing. Management's goal is to be compliant with regulatory guidelines by June 1999, although no assurances can be given that the Corporation will be able to satisfy this objective. At present, total costs to the Corporation of achieving Year 2000 compliance are estimated at $470,000, of which the Corporation has incurred $251,000 as of December 31, 1998. Approximately 75 to 80 percent will be invested in new technology while the remainder approximates the amount of direct expense. However, management believes that such costs may rise if and when additional issues arise that may require additional expenditures to make the Corporation Year 2000 compliant. During the second half of 1998 management began the development of a comprehensive contingency plan. As part of its contingency planning, the Corporation implemented a due diligence process that identified significant customers, and third parties posing material Year 2000 risks, evaluated their Year 2000 preparedness, assessed their Year 2000 risk and evaluated appropriate risk controls. Validation of the various components of the contingency plan is scheduled for the second quarter of 1999. The immediately preceding sentence constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the Corporation's forward-looking statement as a result of a variety of factors, including potential unavailability of technological resources, increased expenses associated with obtaining such resources and unanticipated technological difficulties. The Corporation believes that its Year 2000 project will allow it to be Year 2000 compliant in a timely manner. There can be no assurances, however, that the Corporation's information technology systems or those of a third party on which the Corporation relies will be Year 2000 compliant by the year 2000 or that the Corporation's contingency plans will mitigate the effects of any noncompliance. An interruption of the Corporation's ability to conduct its business due to a Year 2000 readiness problem could have a material adverse effect on the Corporation's business operations or financial condition. 26 ASSET AND LIABILITY MANAGEMENT Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporation's statement of condition is planned and monitored by the Asset and Liability Committee (ALCO). In general, management's objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring these components of the statement of condition. INTEREST SENSITIVITY MARKET RISK "Market risk" represents the risk of loss from adverse changes in market prices and rates. The Corporation's market rate risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Corporation's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Corporation's earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporation's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporation's net interest income and capital, while structuring the Corporation's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. The management of the Corporation believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Corporation's yield-cost spread through wholesale and retail growth opportunities. The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporation's exposure to differential changes in interest rates between assets and liabilities is the Corporation's analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over one and two-year time horizons has enabled management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on both an immediate rise or fall in interest rates ("rate shock"), as well as gradual changes in interest rates over a 12 month time period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model incorporates assumptions regarding earning-asset and deposit growth, prepayments, interest rates and other factors. Management believes that both individually and in the aggregate these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturity or payment schedules. Based on the results of the interest simulation model as of December 31, 1998, Center Bancorp Inc. would expect a decrease of 10.82 percent in net interest income and an increase of 2.94 percent in net interest income if interest rates increase or decrease by 100 basis points, respectively, from current rates in an immediate and parallel shock over a twelve month period. 27 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap ("Gap") model. The Corporation utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning-asset matures or when its interest rate changes in a time period different from that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different from that of an earning-asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities, total earning assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest sensitive assets and interest sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management's judgment as to projected interest rate trends. The Corporation's rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a short funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset sensitive position, and a ratio less than 1 indicates a liability sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and to reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a failing rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position. At December 31, 1998, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio) of .39:1.00 at the cumulative one year position. During much of 1998 the Corporation had a negative interest sensitivity gap. The maintenance of a liability-sensitive position during 1998 has had a favorable impact on the Corporation's net interest margins; however, based on management's perception that interest rates will continue to be volatile, emphasis has been, and is expected to continue to be placed on interest-sensitivity matching with the objective of maintaining and/or increasing the net interest spread during 1999. 28 The following table depicts the Corporation's interest rate sensitivity position at December 31, 1998: Expected Maturity/Principal Repayment December 31,
- ------------------------------------------------------------------------------------------- Average Year Year Year Interest End End End (dollars in thousands) Rate 1999 2000 2001 - ------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans 7.87% $ 60,809 $ 27,945 $ 21,896 Investments 6.24% 72,661 108,875 42,649 - ------------------------------------------------------------------------------------------- Total interest-earning assets $ 133,470 $ 136,820 $ 64,545 - ------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Time certificates of deposit of $100,000 or greater 4.33% $ 52,525 $ 0 $ 0 Time certificates of deposit of less than $100,000 4.02% 59,554 0 0 Other interest-bearing deposits 2.26% 175,107 5,974 1,404 Securities sold under agreements to repurchase and FHLB advances 4.46% 52,602 0 0 - ------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 339,788 $ 5,974 $ 1,404 - ------------------------------------------------------------------------------------------- Cumulative interest-earning assets 133,470 270,290 334,835 Cumulative interest-bearing liabilities 339,788 345,762 347,166 Rate sensitivity gap (206,318) 130,846 63,141 Cumulative rate sensitivity gap $ (206,318) $ (75,472) $ (12,331) - ------------------------------------------------------------------------------------------- Cumulative gap ratio 0.39% 0.78% 0.96% - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Year Year 2004 Estimated End End And Total Fair (dollars in thousands) 2002 2003 Thereafter Balance Value - ------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans $ 20,561 $ 7,589 $ 11,299 $ 150,099 $151,947 Investments 8,987 11,508 43,286 287,966 290,136 - ------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 29,548 $ 19,097 $ 54,585 $ 438,065 $442,083 - ------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Time certificates of deposit of $100,000 or greater $ 0 $ 0 $ 531 $ 53,056 $ 53,741 Time certificates of deposit of less than $100,000 0 0 0 59,554 59,550 Other interest-bearing deposits 0 0 0 182,485 182,879 Securities sold under agreements to repurchase and FHLB advances 0 0 0 52,602 50,402 - ------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 0 $ 0 $ 531 $ 347,697 $346,572 - ------------------------------------------------------------------------------------------------------- Cumulative interest-earning assets 364,383 383,480 438,065 438,065 Cumulative interest-bearing liabilities 347,166 347,166 347,697 347,697 Rate sensitivity gap 29,548 19,097 54,054 90,368 Cumulative rate sensitivity gap $ 17,217 $ 36,314 $ 90,368 $ 90,368 - ------------------------------------------------------------------------------------------------------- Cumulative gap ratio 1.05% 1.10 % 1.26 % 1.26% - -------------------------------------------------------------------------------------------------------
The table above indicates the time period in which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, this table does not necessarily indicate the impact of general interest rate movements on the Corporation's net interest yield because the repricing of various categories of assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. Expected maturities are contractual maturities adjusted for prepayments of principal based on current market indices. The Corporation uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. For deposits, contractual maturities are assumed for certificates of deposit while other interest-bearing deposits were treated as if subject to immediate withdrawal. LIQUIDITY The liquidity position of the Corporation is dependent on successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers' requests for loans. Such needs can be satisfied by scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit in-flows. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. 29 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Management monitors current and projected cashflows, and adjusts positions as necessary to maintain adequate levels of liquidity. By using a variety of potential funding sources and staggering maturities, the risk of potential funding pressure is significantly reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations which could lead to liquidity concerns. The Corporation derives a significant proportion of its liquidity from its core deposit base. At December 31, 1998, core deposits (comprised of total demand and savings accounts plus money market accounts under $100,000) represented 58.0 percent of total deposits. More volatile rate sensitive deposits, concentrated in Certificates of deposit $100,000 and greater, decreased to 14.1 percent of total deposits from 26.8 percent at December 31, 1997. This change was due to a shift to lower cost and more stable source of funds, primarily borrowings from the Federal Home Loan Bank and securities sold under agreements to repurchase. The following table depicts the Company's core deposit mix at December 31, 1998 and 1997: CORE DEPOSITS MIX
December 31, - --------------------------------------------------------------------------------------------------------------------- 1998 1997 Net Change (dollars in thousands) Amount Percentage Amount Percentage Volume 98 vs. 97 - --------------------------------------------------------------------------------------------------------------------- Demand Deposits $ 82,072 37.2 $ 77,821 34.9 $ 4,251 Interest Bearing Demand 40,579 18.4 43,135 19.3 (2,556) Regular Savings 74,123 33.6 77,602 34.8 (3,479) Money Market Deposits under $100 23,776 10.8 24,548 11.0 (772) - ---------------------------------------------------------------------------------------------------------------- Total core deposits $ 220,550 100.0 $ 223,106 100.0 $ (2,556) - ---------------------------------------------------------------------------------------------------------------- Total deposits $ 377,167 $ 436,010 $ (58,843) - ---------------------------------------------------------------------------------------------------------------- Core deposits to total deposits 58% 51% - ----------------------------------------------------------------------------------------------------------------
Short-term borrowings can be used to satisfy daily funding needs. Balances in those accounts fluctuate on a day-to-day basis. The Corporation's principal short-term funding sources are securities sold under agreement to repurchase. Average short-term borrowings during 1998 amounted to approximately $8.4 million, a decrease of $2.4 million or 22.1 percent from the 1997 period. The following table is a summary of securities sold under repurchase agreements for each of the last three years.
December 31, - -------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------- Securities sold under repurchase agreements: Average interest rate: At year end 3.71% 6.75% -- For the year 3.40% 5.68% 5.69% Average amount outstanding during the year: $ 8,455 $10,858 $ 6,610 Maximum amount outstanding at any month end $15,063 $27,320 $ 21,145 Amount outstanding at year end $11,602 $ 700 $ 0 - --------------------------------------------------------------------------------------
30 CASH FLOW The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During 1998 cash and cash equivalents (which decreased overall by $10.1 million) were provided (on a net basis) by operating activities and used (on a net basis) in investing and financing activities. Cash flow from operating activities, primarily net income, was used in investing activities primarily the increased volume of loans. STOCKHOLDERS' EQUITY AND DIVIDENDS--STOCKHOLDERS' EQUITY Stockholders' equity averaged $35.5 million during 1998, an increase of $3.6 million, or 11.43 percent, as compared to 1997. At December 31, 1998, stockholders' equity totaled $36.6 million, a 9.60 percent increase over the prior year. The Corporation's dividend reinvestment and optional stock purchase plan contributed $320,000 in new capital during 1998. Book value per share increased at year end 1998 to $10.24 from the prior year amount of $9.44. Tangible book value at year end 1998 was $9.38 compared to $8.48 for 1997. CAPITAL The maintenance of a solid capital foundation continues to be a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment. RISK-BASED CAPITAL/LEVERAGE At December 31, 1998, the Corporation's total Tier l capital (defined as tangible stockholders' equity for common stock and certain perpetual preferred stock) amounted to $33.6 million or 7.14 percent of total assets. The Tier I leverage capital ratio was 6.93 percent of total average assets. Tier I capital excludes the effect of SFAS No. 115, which amounted to $1,113,000 of net unrealized gains, after tax, on securities available-for-sale (reported as a component of accumulated other comprehensive income which is included in stockholders' equity) and goodwill of $3,059,000 as of December 31, 1998. For information on goodwill, see Note 2 to the Consolidated Financial Statements. United States bank regulators have additionally issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorized assets and off balance-sheet items into four risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. At December 31, 1998, the Corporation's estimated Tier I and total risk-based capital ratios were 15.0 percent and 15.6 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of December 31, 1998. For information on risk-based capital and regulatory guidelines for the Bank, see Note 10 to the Consolidated Financial Statements. SECURITY MARKET INFORMATION The common stock of the Corporation is traded on the NASDAQ National Market System, effective as of June 24, 1996. The Corporation's symbol is CNBC. As of December 31, 1998, the Corporation had 606 common stockholders of record. This does not include beneficial owners for whom CEDE & Company or others act as nominees. On December 31, 1998, the closing market bid and ask price was $16.75-$17.375, respectively. Since June 24, 1996, prices were reported by NASDAQ. For prior years the high and low bid prices were reported by National Quotation Bureau. 31 [LOGO] MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Dividends declared on common stock, per share and stock prices, have been adjusted for the three-for-two stock split distributed in May of 1998 and the 5 percent stock dividend distributed in May of 1997. The following table sets forth the high and low bid prices for the Corporation's common stock.
Common Stock Price Common 1998 1997 Dividends Declared - --------------------------------------------------------------------------------------------------- High Low High Low Bid Bid Bid Bid 1998 1997 - --------------------------------------------------------------------------------------------------- Fourth Quarter $ 18.00 $ 15.75 $ 16.67 $ 15.67 $ 0.15 $ 0.1333 Third Quarter 18.25 15.13 16.67 16.50 0.15 0.1333 Second Quarter 20.00 18.00 16.50 13.97 0.1333 0.1333 First Quarter 18.33 15.50 13.95 13.33 0.1333 0.1266 - --------------------------------------------------------------------------------------------------- $0.5666 $ 0.5265 - ---------------------------------------------------------------------------------------------------
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 13 to the Consolidated Financial Statements. LOOKING FORWARD One of the Corporation's primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation's ability to achieve its objectives: The financial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation's ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace. Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations is mitigated by ALCO strategies, significant changes in interest rates can have an adverse impact on profitability. The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance. Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has already taken steps to improve its traditional delivery channels. However, continued success will be measured by the ability to react to future technological changes. 32 AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
Years Ended December 31, - --------------------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - --------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Investment securities:(1) Taxable $281,312 $18,512 6.58% $290,002 $19,211 6.62% Non-taxable 14,994 1,061 7.08% 19,847 1,448 7.30% Federal funds sold and securities purchased under agreement to resell 9,986 550 5.51% 9,866 548 5.55% Loans, net of unearned income(2) 138,967 10,924 7.86% 125,476 9,980 7.96% - --------------------------------------------------------------------------------------------------------- Total interest-earning assets 445,259 31,047 6.97% 445,191 31,187 7.01% - --------------------------------------------------------------------------------------------------------- Noninterest-earning assets: Cash and due from banks 12,285 15,570 Other assets 17,569 19,432 Allowance for possible loan losses (1,314) (1,280) - --------------------------------------------------------------------------------------------------------- Total noninterest- earning assets 28,540 33,722 - --------------------------------------------------------------------------------------------------------- Total assets $473,799 $478,913 - --------------------------------------------------------------------------------------------------------- LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: Money market deposits $ 60,061 1,776 2.96% $ 56,668 1,562 2.76% Savings deposits 75,329 1,666 2.21% 80,635 1,961 2.43% Time deposits 152,749 7,942 5.20% 177,739 9,507 5.35% Other interest-bearing Deposits 43,077 767 1.78% 45,687 840 1.84% Short-term borrowings and FHLB advances 30,675 1,422 4.64% 10,858 617 5.68% - --------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 361,891 13,573 3.75% 371,587 14,487 3.90% - --------------------------------------------------------------------------------------------------------- Noninterest-bearing liabilities: Demand deposits 72,564 71,974 Other noninterest-bearing deposits 438 364 Other liabilities 3,410 3,134 - --------------------------------------------------------------------------------------------------------- Total noninterest-bearing liabilities 76,412 75,472 - --------------------------------------------------------------------------------------------------------- Stockholders' equity 35,496 31,854 - --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $473,799 $478,913 - --------------------------------------------------------------------------------------------------------- Net interest income (tax-equivalent basis) $17,474 $16,700 - --------------------------------------------------------------------------------------------------------- Net interest spread 3.22% 3.11% - --------------------------------------------------------------------------------------------------------- Net interest income as percent of earning assets 3.92% 3.75% - --------------------------------------------------------------------------------------------------------- Tax-equivalent adjustment (361) (481) - --------------------------------------------------------------------------------------------------------- Net interest income $17,113 $16,219 - --------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------- 1996 - ----------------------------------------------------------------------- Interest Average Average Income/ Yield/ Balance Expense Rate - ----------------------------------------------------------------------- ASSETS Interest-earning assets: Investment securities:(1) Taxable $244,939 $16,201 6.61% Non-taxable 23,655 1,701 7.19% Federal funds sold and securities purchased under agreement to resell 8,551 481 5.63% Loans, net of unearned income(2) 107,897 8,625 7.99% - ----------------------------------------------------------------------- Total interest-earning assets 385,042 27,008 7.01% - ----------------------------------------------------------------------- Noninterest-earning assets: Cash and due from banks 14,942 Other assets 16,229 Allowance for possible loan losses (1,236) - ----------------------------------------------------------------------- Total noninterest- earning assets 29,935 - ----------------------------------------------------------------------- Total assets $414,977 - ----------------------------------------------------------------------- LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: Money market deposits $ 61,168 1,832 3.00% Savings deposits 77,835 1,904 2.45% Time deposits 127,452 6,620 5.19% Other interest-bearing Deposits 48,226 854 1.77% Short-term borrowings and FHLB advances 6,610 376 5.69% - ----------------------------------------------------------------------- Total interest-bearing liabilities 321,291 11,586 3.61% - ----------------------------------------------------------------------- Noninterest-bearing liabilities: Demand deposits 62,910 Other noninterest-bearing deposits 320 Other liabilities 1,863 - ----------------------------------------------------------------------- Total noninterest-bearing liabilities 65,093 - ----------------------------------------------------------------------- Stockholders' equity 28,593 - ----------------------------------------------------------------------- Total liabilities and stockholders' equity $414,977 - ----------------------------------------------------------------------- Net interest income (tax-equivalent basis) $15,422 - ----------------------------------------------------------------------- Net interest spread 3.40% - ----------------------------------------------------------------------- Net interest income as percent of earning assets 4.01% - ----------------------------------------------------------------------- Tax-equivalent adjustment (578) - ----------------------------------------------------------------------- Net interest income $14,844 - -----------------------------------------------------------------------
(1) Average balances for available-for-sale securities are based on amortized cost (2) Average balances for loans include loans on non-accrual status 33 [LOGO] CONSOLIDATED STATEMENTS OF CONDITION
December 31, - --------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 3) $ 15,975 $ 15,210 Federal funds sold 0 10,900 - --------------------------------------------------------------------------------------------- Total cash and cash equivalents 15,975 26,110 Investment securities held to maturity (approximate market value of $174,184 in 1998 and $198,960 in 1997) 172,014 196,980 Investment securities available-for-sale 115,952 101,318 - --------------------------------------------------------------------------------------------- Total investment securities (Note 4) 287,966 298,298 Loans, net of unearned income (Note 5) 150,099 132,424 Less--Allowance for loan losses (Note 5) 1,326 1,269 - --------------------------------------------------------------------------------------------- Net loans 148,773 131,155 Premises and equipment, net (Note 6) 9,426 9,130 Accrued interest receivable 4,120 4,350 Other assets 815 687 Goodwill (Note 2) 3,059 3,382 - --------------------------------------------------------------------------------------------- Total assets $470,134 $473,112 - --------------------------------------------------------------------------------------------- LIABILITIES Deposits: Non-interest bearing $ 82,072 $ 77,821 Interest bearing: Certificates of deposit $100,000 and over 53,056 116,746 Savings and Time Deposits 242,039 241,443 - --------------------------------------------------------------------------------------------- Total Deposits 377,167 436,010 Federal funds purchased and securities sold under agreements to repurchase (Note 7) 12,602 700 Federal Home Loan Bank Advances (Note 7) 40,000 0 Accounts payable and accrued liabilities (Notes 8 and 9) 3,734 2,980 - --------------------------------------------------------------------------------------------- Total liabilities 433,503 439,690 - --------------------------------------------------------------------------------------------- Commitments and contingencies (Note 14) STOCKHOLDERS' EQUITY (Notes 10 and 13) Common stock, no par value: Authorized 20,000,000 shares; issued 4,030,637 and 4,012,373 shares in 1998 and 1997, respectively 7,616 7,296 Additional paid in capital 3,660 3,513 Retained earnings 25,978 23,829 Treasury stock at cost (452,488 and 470,202 shares in 1998 and 1997, respectively) (1,736) (1,808) Accumulated other comprehensive income 1,113 592 - --------------------------------------------------------------------------------------------- Total stockholders' equity 36,631 33,422 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $470,134 $473,112 - ---------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, - -------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 10,924 $ 9,980 $ 8,625 Interest and dividends on investment securities: Taxable interest income 18,315 19,173 16,172 Nontaxable interest income 700 967 1,123 Dividends 197 38 29 Interest on Federal funds sold and securities purchased under agreement to resell 550 548 481 - -------------------------------------------------------------------------------------------------------------- Total interest income 30,686 30,706 26,430 - -------------------------------------------------------------------------------------------------------------- Interest expense: Interest on certificates of deposit $100,000 and over 4,301 5,836 4,113 Interest on other deposits 7,850 8,034 7,097 Interest on borrowings 1,422 617 376 - -------------------------------------------------------------------------------------------------------------- Total interest expense 13,573 14,487 11,586 - -------------------------------------------------------------------------------------------------------------- Net interest income 17,113 16,219 14,844 Provision (credit) for loan losses (Note 5) 120 0 (132) - -------------------------------------------------------------------------------------------------------------- Net interest income after provision (credit) for loan losses 16,993 16,219 14,976 - -------------------------------------------------------------------------------------------------------------- Other income: Service charges, commissions and fees 748 638 516 Other income 223 139 136 Gain on securities sold (Note 4) 0 334 75 - -------------------------------------------------------------------------------------------------------------- Total other income 971 1,111 727 - -------------------------------------------------------------------------------------------------------------- Other expense: Salaries and employee benefits (Note 8) 6,005 5,487 5,168 Occupancy expense, net (Note 14) 1,063 1,015 910 Premises and equipment expense (Note 14) 1,297 1,341 1,141 Stationery and printing expense 438 254 525 Marketing and advertising expense 446 337 422 Other expenses 2,402 2,162 1,744 - -------------------------------------------------------------------------------------------------------------- Total other expense 11,651 10,596 9,910 - -------------------------------------------------------------------------------------------------------------- Income before income tax expense 6,313 6,734 5,793 Income tax expense (Note 9) 2,141 2,223 1,636 - -------------------------------------------------------------------------------------------------------------- Net income $ 4,172 $ 4,511 $ 4,157 - -------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.17 $ 1.28 $ 1.18 Diluted $ 1.16 $ 1.27 $ 1.18 Weighted average common shares outstanding: Basic 3,563,312 3,534,099 3,513,756 Diluted 3,597,514 3,560,225 3,522,579 - --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996 - -------------------------------------------------------------------------- Common Stock Common Additional (in thousands, Shares Stock Paid In Except share data) Outstanding Amount Capital - -------------------------------------------------------------------------- Balance December 31, 1995 3,336,600 $ 4,199 $ 3,510 - -------------------------------------------------------------------------- YEAR 1996 Cash dividend Issuance of common stock 19,336 269 Comprehensive income: Net income Unrealized holding losses on securities arising during the period (net of tax of ($45)) Less-reclassification adjustment for gains included in net income (net of tax of $25) Net unrealized holding loss on securities arising during the period (net of tax of ($70)) Total comprehensive income - -------------------------------------------------------------------------- Balance December 31, 1996 3,355,936 $ 4,468 $ 3,510 - -------------------------------------------------------------------------- YEAR 1997 Cash dividend Common stock dividend 167,863 2,557 Issuance of common stock 17,566 271 Exercise of stock options 806 3 Comprehensive income: Net income Unrealized holding gains on securities arising during the period (net of tax of $300) Less reclassification adjustment for gains included in net income (net of tax of $114) Net unrealized holding gain on securities arising during the period (net of tax of $186) Total comprehensive income - -------------------------------------------------------------------------- Balance, December 31, 1997 3,542,171 $ 7,296 $ 3,513 - -------------------------------------------------------------------------- YEAR 1998 Cash dividend Issuance of common stock 18,264 320 Exercise of stock options 17,714 147 Comprehensive income: Net income Unrealized holding gain on securities arising during the period (net of taxes of $347) Total comprehensive income - -------------------------------------------------------------------------- Balance December 31, 1998 3,578,149 $ 7,616 $ 3,660 - --------------------------------------------------------------------------
Years Ended December 31, 1998, 1997 and 1996 --------------------------------------------------------- Accumulated Total Other Stock- (in thousands, Retained Treasury Comprehensive holders' Except share data) Earnings Stock Income Equity - -------------------------------------------------------------------------------------------- Balance December 31, 1995 $ 21,368 $ (1,814) $ 416 $ 27,679 - -------------------------------------------------------------------------------------------- YEAR 1996 Cash dividend (1,787) (1,787) Issuance of common stock 269 Comprehensive income: Net income 4,157 4,157 Unrealized holding losses on securities arising during the period (net of tax of ($45)) (55) Less-reclassification adjustment for gains included in net income (net of tax of $25) 50 Net unrealized holding loss on securities arising during the period (net of tax of ($70)) (105) (105) -------- Total comprehensive income 4,052 - -------------------------------------------------------------------------------------------- Balance December 31, 1996 $ 23,738 $ (1,814) $ 311 $ 30,213 - -------------------------------------------------------------------------------------------- YEAR 1997 Cash dividend (1,863) (1,863) Common stock dividend (2,557) Issuance of common stock 271 Exercise of stock options 6 9 Comprehensive income: Net income 4,511 4,511 Unrealized holding gains on securities arising during the period (net of tax of $300) 501 Less reclassification adjustment for gains included in net income (net of tax of $114) 220 --- Net unrealized holding gain on securities arising during the period (net of tax of $186) 281 281 --- Total comprehensive income 4,792 - -------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 23,829 $ (1,808) $ 592 $ 33,422 - -------------------------------------------------------------------------------------------- YEAR 1998 Cash dividend (2,023) (2,023) Issuance of common stock 320 Exercise of stock options 72 219 Comprehensive income: Net income 4,172 4,172 Unrealized holding gain on securities arising during the period (net of taxes of $347) 521 521 --- Total comprehensive income 4,693 - -------------------------------------------------------------------------------------------- Balance December 31, 1998 $ 25,978 $ (1,736) $1,113 $ 36,631 - --------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,172 $ 4,511 $ 4,157 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,413 1,484 1,117 Provision (credit) for loan losses 120 0 (132) Provision for deferred taxes 108 433 286 Gain on sale of investment securities 0 334 75 Decrease (increase) in accrued interest receivable 230 21 (728) (Increase) decrease in other assets (236) 197 (5,139) Increase in other liabilities 973 629 245 Amortization of premium and accretion of discount on investment securities net 179 217 445 - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,959 7,826 326 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 63,914 10,321 22,236 Proceeds from maturities of securities held to maturity 80,494 69,813 64,356 Proceeds from sales of investment securities available-for-sale 0 26,153 14,400 Purchase of securities available-for-sale (63,817) (84,256) (75,715) Purchase of securities held to maturity (69,917) (40,468) (96,333) Net increase in loans (17,738) (14,618) (19,908) Property and equipment expenditures, net (1,386) (186) (3,617) - -------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (8,450) (33,241) (94,581) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits (58,843) 9,356 130,988 Dividends paid (2,023) (1,863) (1,787) Proceeds from issuance of common stock 320 271 269 Net increase (decrease) in short-term borrowing 51,902 700 (22,326) - -------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (8,644) 8,464 107,144 - -------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (10,135) (16,951) 12,889 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 26,110 43,061 30,172 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 15,975 $ 26,110 $ 43,061 - -------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Interest paid on deposits and short-term borrowings $ 13,465 $ 14,433 $ 11,547 Income taxes $ 2,005 $ 2,002 $ 1,627 Cash paid for Bank acquisition $ 0 $ 0 $ 5,550 - --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 [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 and Morris Counties, New Jersey. The Bank is subject to competition from other financial institutions and is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for that period. Actual results could differ significantly from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from banks, Federal funds sold, and securities purchased under agreement to resell. Generally, Federal funds and securities purchased under agreement to resell are sold for one-day periods. INVESTMENT SECURITIES The Corporation classifies investments into the following categories: (1) held to maturity securities, for which the Corporation has both the positive intent and ability to hold until maturity, 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 component of accumulated other comprehensive income which is included in stockholders' equity and excluded from earnings. Investment securities held to maturity are adjusted for amortization of premiums and accretion of discounts which are recognized on a level yield method, as adjustments to interest income. Investment securities gains or losses are determined using the specific identification method. 38 INCOME TAXES The Corporation recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be settled. LOANS Loans are stated at their principal amounts less net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal; in those cases the recognition of income is discontinued. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loan's yield. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Impaired loans include, at the minimum, non-accrual loans and loans internally classified as substandard or below in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are considered in the Bank's credit evaluation process. The Corporation does not have any impaired loans at December 31, 1998 and 1997. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level determined adequate to provide for potential loan losses. The allowance is increased by provisions charged to operations and reduced by loan charge-offs, net of recoveries. The allowance is based on management's evaluation of the loan portfolio considering economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit situations. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties. The ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness of the borrowers. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in New Jersey. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. 39 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. PENSION PLAN The Corporation has a non-contributory pension plan covering all eligible employees. The Corporation's policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in non-interest expense. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits". This Statement standardizes the disclosure requirements for pensions and other post retirement benefits by requiring additional information that will facilitate financial analysis, and eliminating certain disclosures that are considered no longer useful. This Statement is effective for fiscal years beginning after December 15, 1997. Restatement of disclosures for earlier periods provided for comparative purposes is required unless the information is not readily available. Disclosure relative to SFAS No. 132 is included in Note 8 Pension and Benefits. STOCK BASED COMPENSATION The Corporation accounts for stock options using the intrinsic value method under APB opinion No. 25 and provides the required disclosures of fair values under SFAS No. 123, "Accounting for Stock-Based Compensation." EARNINGS PER SHARE All share and per share amounts have been restated to reflect the three-for-two stock split distributed in May of 1998 and the 5% stock dividend distributed in May of 1997 and the 3-for-2 stock split paid on May 31, 1996. On March 3, 1997, The Financial Accounting Standards board (the "FASB") issued statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". EPS on the face of the income statement. Basic EPS replaced the current EPS terminology and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g. stock options). The Corporation adopted SFAS No. 128 for the period ended December 31, 1997. All prior-period EPS data is restated as required. The Corporation's weighted average common shares outstanding for diluted EPS include the effect of stock options outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS. 40 TREASURY STOCK Treasury stock is recorded using the cost method and accordingly is presented as an unallocated reduction of stockholders' equity. COMPREHENSIVE INCOME On January 1, 1998, the Bank adopted Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The statement defines total comprehensive income as all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Bank's other comprehensive income is comprised of unrealized holding gains and losses on securities available for sale. Prior period financial statements have been reclassified to reflect the applications of the provisions of SFAS 130. Disclosure of comprehensive income for the years ended 1998, 1997 and 1996 is presented in the Consolidated Statements of Changes in Stockholders' Equity. RECLASSIFICATIONS Certain reclassifications have been made in the consolidated financial statements for 1997 and 1996 to conform to the classifications presented in 1998. NOTE 2: ACQUISITION On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA (Lehigh), a New Jersey chartered savings and loan in a transaction accounted for under the purchase method of accounting. At June 28, 1996, Lehigh had assets of $70.9 million (primarily cash and cash equivalents of $53.0 million and loans of $15.0 million) and deposits and stockholders' equity of $68.2 million and $2.7 million, respectively. The Corporation paid $5.5 million in cash for Lehigh, resulting in goodwill of $3.8 million. The goodwill is being amortized on a straight-line basis over 15 years. The consolidated financial statements of the Corporation include assets, liabilities and results of operations of Lehigh since the acquisition date. NOTE 3: CASH AND DUE FROM BANKS The subsidiary bank, Union Center National Bank, maintained cash balances reserved to meet regulatory requirements of the Federal Reserve Board of approximately $238,000 and $86,000 at December 31, 1998 and 1997, respectively. NOTE 4: INVESTMENT SECURITIES The following tables present information related to the Corporation's portfolio of securities held to maturity and available-for-sale at December 31, 1998 and 1997.
December 31, 1998 - ---------------------------------------------------------------------------------------------------------------- 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 $123,581 $1,192 $228 $124,545 Obligations of U.S. states and political subdivisions 36,881 947 28 37,800 Other securities 11,552 287 0 11,839 - ---------------------------------------------------------------------------------------------------------------- $172,014 $2,426 $256 $174,184 - ----------------------------------------------------------------------------------------------------------------
41 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4: INVESTMENT SECURITIES (continued)
December 31, 1998 - ---------------------------------------------------------------------------------------------------------------- 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 $ 88,493 $1,446 $94 $ 89,845 Obligations of U.S. states and political subdivisions 9,225 264 0 9,489 Other securities 12,375 237 0 12,612 Federal Reserve and Federal Home Loan Bank stock 4,006 0 0 4,006 - ---------------------------------------------------------------------------------------------------------------- $114,099 $1,947 $94 $115,952 - ----------------------------------------------------------------------------------------------------------------
December 31, 1997 - ---------------------------------------------------------------------------------------------------------------- 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 $152,388 $1,376 $181 $153,583 Obligations of U.S. states and political subdivisions 33,542 612 4 34,150 Other securities 11,050 195 18 11,227 - ---------------------------------------------------------------------------------------------------------------- $196,980 $2,183 $203 $198,960 - ----------------------------------------------------------------------------------------------------------------
December 31, 1997 - ---------------------------------------------------------------------------------------------------------------- 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 $ 81,465 $ 846 $ 29 $ 82,282 Obligations of U.S. states and political subdivisions 5,775 83 0 5,858 Other securities 11,486 91 5 11,572 Federal Reserve and Federal Home Loan Bank stock 1,606 0 0 1,606 - ---------------------------------------------------------------------------------------------------------------- $100,332 $1,020 $ 34 $101,318 - ----------------------------------------------------------------------------------------------------------------
The following table presents information for investments in securities held to maturity and debt securities available-for-sale at December 31, 1998, 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 $ 52,603 $ 53,320 $ 34,528 $ 34,588 Due after one year through five years 76,264 76,488 65,679 67,353 Due after five years through ten years 28,656 29,716 3,451 3,516 Due after ten years 14,491 14,660 6,435 6,489 - ------------------------------------------------------------------------------------------------ $172,014 $174,184 $110,093 $111,946 - ------------------------------------------------------------------------------------------------
During 1998 the Corporation did not sell any securities from its available-for-sale portfolio. Securities sold from the Corporation's available-for-sale portfolio during 1997 and 1996 amounted to $26.2 and $14.4 million respectively. The gains on securities sold amounted to approximately $334,000 in 1997 and $121,000 in 1996 which were offset by losses on securities sold of approximately $46,000 in 1996. These securities were sold in the ordinary course of business. 42 Investment securities having a carrying value of approximately $83.1 million and $36.6 million at December 31, 1998 and 1997, respectively, were pledged to secure public deposits, short-term borrowings, FHLB advances and for other purposes required or permitted by law. NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES The following table sets forth the composition of the Corporation's loan portfolio at December 31, 1998 and 1997, respectively. (dollars in thousands) 1998 1997 - --------------------------------------------------------------- Real estate--residential mortgage $ 91,189 $ 88,067 Real estate--commercial 21,338 20,136 Commercial and industrial 30,844 19,261 Installment 5,642 5,135 All other 1,418 430 Less unearned income (332) (605) - --------------------------------------------------------------- Loans, net of unearned income $150,099 $132,424 - --------------------------------------------------------------- At December 31, 1998 and 1997 loans to officers and directors aggregated approximately $3,485,000 and $3,133,000 respectively. During the year ended December 31, 1998, the Corporation made new loans to officers and directors in the amount of $2,041,000; payments by such persons during 1998 aggregated $1,689,000. Management is of the opinion that the above loans were made on the same terms and conditions as those prevailing for comparable transactions with non-related borrowers. A summary of the activity in the allowance for loan losses is as follows: (dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Balance at the beginning of the year $1,269 $1,293 $1,073 Provision (credit) for loan losses 120 0 (132) Loans charged off (70) (31) (479) Recoveries on loans previously charged off 7 7 138 Adjustments from acquisition of Lehigh 0 0 693 - ------------------------------------------------------------------------------ Balance at the end of the year $1,326 $1,269 $1,293 - ------------------------------------------------------------------------------ The allowance for loan losses for Federal income tax purposes amounted to $688,000 and $801,000 at December 31, 1998 and 1997, which is the maximum allowable. Total non-performing assets are comprised of the outstanding balances of accruing loans which are 90 days or more past due as to principal or interest payments, non-accrual loans and other real estate owned at December 31, 1998 and 1997 were as follows: (dollars in thousands) 1998 1997 - -------------------------------------------------------------------------- Loans past due in excess of 90 days and still accruing $ 24 $ 73 Non-accrual loans 41 27 Other real estate owned 73 0 - -------------------------------------------------------------------------- Total non-performing assets $138 $100 - -------------------------------------------------------------------------- The amount of interest income that would have been recorded on non-accrual loans in 1998 and 1997, had payments remained in accordance with the original contractual terms, approximated $3,000, and $2,800, respectively, while no interest income was received on these types of assets in 1998 and 1997, resulting in a loss of interest income of $3,000 and $2,800, respectively. At December 31, 1998, there were no commitments to lend additional funds to borrowers whose loans were non-accrual or contractually past due in excess of 90 days and still accruing interest. 43 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued) The Bank's policy is to grant commercial, mortgage, and installment loans to New Jersey residents and businesses within its trading area. The borrowers' abilities to repay their obligations are dependent upon various factors including the borrowers' income and net worth, cash flows generated by the borrowers' underlying collateral, value of the underlying collateral, and priority of the Bank's lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank's control. The Bank is therefore subject to risk of loss. The Bank believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and personal guarantees are required for virtually all loans. NOTE 6: BANK PREMISES AND EQUIPMENT A summary of the Corporation's premises and equipment at December 31, 1998 and 1997 follows: (dollars in thousands) 1998 1997 - ----------------------------------------------------------------------- Land $ 1,649 $ 1,678 Buildings 5,653 5,395 Furniture, fixtures and equipment 7,778 7,166 Leasehold improvements 1,105 934 - ----------------------------------------------------------------------- Subtotal 16,185 15,173 Less accumulated depreciation and amortization 6,759 6,043 - ----------------------------------------------------------------------- Total $ 9,426 $ 9,130 - ----------------------------------------------------------------------- NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS At December 31, 1998 advances from the Federal Home Loan Bank (FHLB) amounted to $40,000,000, there were no FHLB advances outstanding at December 31, 1997. The FHLB advances have a weighted average interest rate of 4.80 percent at December 31, 1998. These advances are secured by pledges of FHLB stock and U.S. Government and Federal Agency obligations. The advances are subject to quarterly call provisions at the discretion of FHLB and at December 31, 1998, are scheduled for repayment as follows: (dollars in thousands) 1998 - ----------------------------------- 2003 $10,000 2008 30,000 - ----------------------------------- Total $40,000 - ----------------------------------- Other borrowings consisting of securities sold under agreements to repurchase had average balances of $8,455,000, $10,858,000, and $6,610,000 for the years ending December 31, 1998, 1997 and 1996, respectively. The maximum amount outstanding at any month end during 1998, 1997 and 1996 respectively was $15,063,000, $27,320,000 and $21,145,000. NOTE 8: 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 non-qualified retirement plan which is designed to supplement the pension plan for key employees. In 1998 the Corporation adopted a Director's Retirement Plan which is designed to provide benefits for members of the Board of Directors. The expense associated with the plan amounted to $116,359 for 1998 and was included in non-interest expense. 44 The following table sets forth change in projected benefit obligation, change in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Corporation's pension plans at December 31, 1998 and 1997. Change in Benefit Obligation 1998 1997 - ------------------------------------------------------------------------- Projected benefit obligation at beginning of year $4,499 $4,055 Service cost 332 246 Interest cost 328 296 Actuarial (gain) loss (367) 111 Benefits paid (214) (209) - ------------------------------------------------------------------------- Projected benefit obligation at end of year $4,578 $4,499 - ------------------------------------------------------------------------- Change in Plan Assets - --------------------------------------------------------------------------- Fair value of plan assets at beginning of year $ 3,981 $ 3,569 Actual return on plan assets 415 446 Employer contributions 187 175 Benefits paid (214) (209) - --------------------------------------------------------------------------- Fair value of plan assets at end of year $ 4,369 $ 3,981 - --------------------------------------------------------------------------- Funded status $ (209) $ (518) Unrecognized net asset (13) (16) Unrecognized prior service cost 140 155 Unrecognized gain (1,034) (564) - --------------------------------------------------------------------------- Accrued benefit cost $ (1,116) $ (943) - --------------------------------------------------------------------------- The net periodic pension cost for 1998, 1997 and 1996 includes the following components. (dollars in thousands) 1998 1997 1996 - ----------------------------------------------------------------- Service cost $ 332 $ 246 $ 199 Interest cost 328 296 262 Actual return on plan assets (415) (446) (308) Net amortization and deferral 115 168 39 - ----------------------------------------------------------------- Net periodic pension expense $ 360 $ 264 $ 192 - ----------------------------------------------------------------- The following table presents the assumptions used to calculate the projected benefit obligation in each of the last three years.
1998 1997 1996 - ---------------------------------------------------------------------------------------- Discount rate 7.50% 7.50% 7.50% Rate of compensation increase 6.50% 6.50% 6.50% Expected long-term rate of return on plan assets 8.00% 8.00% 8.00% - ----------------------------------------------------------------------------------------
401K BENEFIT PLAN The Corporation maintains a 401K employee savings plan to provide for defined contributions which covers substantially all employees of the Bank. The Corporation's contributions to the plan are limited to fifty percent of a matching percentage of each employee's contribution up to six percent of the employee's salary. For 1998, 1997, and 1996, employer contributions amounted to $61,691, $60,777 and $43,928, respectively. STOCK OPTION PLANS The Stock Option Plans permit Center Bancorp Inc. common stock to be issued to key employees and directors of the Corporation and its subsidiary. The options granted under the Plan are intended to be either Incentive Stock Options or Non-Qualified Options. 45 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8: PENSION AND BENEFITS (continued) 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 additional paid in capital. Changes in options outstanding during the past three years were as follows: Exercise Price Range Stock Option Plan Shares Per Share - ----------------------------------------------------------------------- Outstanding, December 31, 1995, (80,373 shares exercisable) 161,241 $11.53 to $12.39 Granted during 1996 0 Exercised during 1996 0 Expired or canceled during 1996 (4,962) $12.39 - ----------------------------------------------------------------------- Outstanding, December 31, 1996, (127,505 shares exercisable) 156,279 $11.53 to $12.39 Granted during 1997 14,885 $13.81 Exercised during 1997 (806) $11.53 Expired or canceled during 1997 0 - ----------------------------------------------------------------------- Outstanding, December 31, 1997, (146,106 shares exercisable) 170,358 $11.53 to $13.81 Granted during 1998 0 Exercised during 1998 (17,714) $11.53 to $13.81 Expired or canceled during 1998 0 - ----------------------------------------------------------------------- Outstanding, December 31, 1998 (142,976 shares exercisable) 152,644 $11.53 to $13.81 - ----------------------------------------------------------------------- Fair Value of Stock Options Grants The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: o Dividend yield of 3.70% o Expected volatility of 44.3% o Risk-free interest rates based upon equivalent-term Treasury Rates o Expected options lives were the contractual lives at the date of grant 46 The following table summarizes the fair value of the stock options granted during the last three years ended December 31, 1998. There were no grants of stock options in 1998 or in 1996.
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Options Weighted Options Weighted Options Weighted Granted Average Fair Granted Average Fair Granted Average Fair Value Value Value - -------------------------------------------------------------------------------------------------------------------- Incentive stock options 0 $ 0 0 $ 0 0 $ 0 Non-qualifying stock options 0 $ 0 0 $ 0 0 $ 0 Directors' plan 0 $ 0 14,885 $ 5.83 0 $ 0 - -------------------------------------------------------------------------------------------------------------------- Total 0 $ 0 14,885 $ 5.83 0 $ 0 - --------------------------------------------------------------------------------------------------------------------
Under APB Opinion 25, compensation cost for the stock options is not recognized because the exercise price of the stock options equals the market price of the underlying stock on the date of the grant. Had compensation expense been recorded for stock options granted as determined under SFAS 123, net income would have been reduced by approximately $19,000 in 1998 and $19,000 in 1997 which would not have changed the Corporation's basic earnings per share, but which would have reduced the diluted earnings per share by $.01 in 1998 and $.01 in 1997. NOTE 9: INCOME TAXES The current and deferred amounts of income tax expense for the years ended December 31, 1998, 1997 and 1996, respectively, are as follows: (dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------- CURRENT: Federal $1,871 $1,569 $1,203 State 162 221 147 - ---------------------------------------------------------- 2,033 1,790 1,350 - ---------------------------------------------------------- DEFERRED: Federal 108 433 286 - ---------------------------------------------------------- Income tax expense $2,141 $2,223 $1,636 - ---------------------------------------------------------- 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) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Income before income tax expense $ 6,313 $ 6,734 $ 5,793 Federal statutory rate 34% 34% 34% - ---------------------------------------------------------------------------------------- Computed "expected" Federal income tax expense 2,146 2,289 1,970 State tax net of Federal tax benefit 107 144 64 Tax-exempt interest and dividends (223) (298) (359) Other, net 111 88 (39) - ---------------------------------------------------------------------------------------- Income tax expense $ 2,141 $ 2,223 $ 1,636 - ----------------------------------------------------------------------------------------
47 {LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 9: INCOME TAXES (continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 1998 and 1997 are presented below. (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------ Deferred tax assets: Allowance for loan losses $ 234 $ 214 Pension expense 392 332 Operating loss carry forward 35 144 - ------------------------------------------------------------------------------ Total gross deferred tax asset 661 690 Valuation allowance (58) (58) - ------------------------------------------------------------------------------ Net deferred tax asset $ 603 $ 632 - ------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation $ 283 $ 293 Market discount accretion 69 55 Deferred fee expense-mortgages 190 135 Unrealized gains on securities available-for-sale 740 393 Other 20 0 - ------------------------------------------------------------------------------ Total gross deferred tax liabilities 1,302 876 - ------------------------------------------------------------------------------ Net deferred tax liability $ (699) $ (244) - ------------------------------------------------------------------------------ Based on the Corporation's historical and current pre-tax earnings and the availability of net operating loss carrybacks on a federal basis, management believes it is more likely than not that the Corporation will realize the benefit of the net deductible temporary differences existing at December 31, 1998 and 1997, 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, 1998 was $58,000 unchanged from 1997. NOTE 10: REGULATORY CAPITAL REQUIREMENTS FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1998, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the FDIC about capital components, risk weightings and other factors. 48 As of December 31, 1998, management believes that the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1998 and 1997, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution:
FDIC Requirements - ------------------------------------------------------------------------------------------------------- Union Center National Minimum Capital For Classification Bank Actuals Adequacy as Well Capitalized - ------------------------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------- December 31, 1998 Leverage (Tier 1) capital $32,092 6.85% $18,760 4.00% $23,298 5.00% - ------------------------------------------------------------------------------------------------------- Risk-based capital: Tier 1 32,092 14.66% 8,633 4.00% 12,949 6.00% Total 33,418 15.48% 17,265 8.00% 21,581 10.00% - ------------------------------------------------------------------------------------------------------- December 31, 1997 - ------------------------------------------------------------------------------------------------------- Leverage (Tier 1) capital $29,215 6.15% $18,900 4.00% $23,456 5.00% - ------------------------------------------------------------------------------------------------------- Risk-based capital: - ------------------------------------------------------------------------------------------------------- Tier 1 29,215 15.90% 7,349 4.00% 11,023 6.00% Total 30,484 16.59% 14,697 8.00% 18,372 10.00% - -------------------------------------------------------------------------------------------------------
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments: The carrying amounts for cash and cash equivalents approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of investment securities is estimated based on bid quotations received from securities dealers. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate-mortgage, and installment loans. The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank's historical experience with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and interest-bearing checking accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1998 and 1997. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of commitments to extend credit and standby letters of credit are estimated at the fee charged by the bank for similar transactions. This amount is deemed to be immaterial. 49 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Short-term borrowings that mature within six months have fair values equal to their carrying value. The fair value of FHLB advances is based on the discounted value of estimated cash flows. The discount rate is estimated using the rates currently offered for similar advances. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, goodwill, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered. The estimated fair value of the Corporation's financial instruments are as follows:
December 31, - ---------------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (dollars in thousands) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ 15,975 $ 15,975 $ 26,110 $ 26,110 Investments Available-for-Sale 115,952 115,952 101,318 101,318 Investments Held to Maturity 172,014 174,184 196,980 198,960 Net loans 148,773 150,621 131,155 132,573 FINANCIAL LIABILITIES: Noninterest-bearing deposits $ 82,072 $ 82,072 $ 77,821 $ 77,821 Interest-Bearing deposits 295,095 296,170 358,189 368,549 Federal funds purchased, securities sold under agreement to repurchase and FHLB advances $ 52,602 $ 50,402 $ 700 $ 700 - ----------------------------------------------------------------------------------------------------
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS Center Bancorp Inc., operates its wholly-owned subsidiary, Union Center National Bank. The earnings of this subsidiary are recognized by the Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Corporation's investment in the subsidiary and dividends paid reduce the investment in the subsidiary. 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 13). Condensed financial statements of the Parent Corporation only are as follows: 50 CONDENSED STATEMENTS OF CONDITION At December 31, - ----------------------------------------------------------------------- (dollars in thousands) 1998 1997 - ----------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 353 $ 195 Investment in subsidiary 36,271 33,188 Other assets 548 487 - ----------------------------------------------------------------------- Total assets $37,172 $33,870 - ----------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 541 $ 448 Stockholders' equity 36,631 33,422 - ----------------------------------------------------------------------- Total liabilities and stockholders' equity $37,172 $33,870 - ----------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME
For years ended December 31, - ----------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Income Dividend income from subsidiary $1,720 $1,677 $ 7,337 Management fees 50 43 38 - ----------------------------------------------------------------------------------------- Total Income 1,770 1,720 7,375 Expenses 159 160 133 - ----------------------------------------------------------------------------------------- Net income before equity in earnings of subsidiary 1,611 1,560 7,242 Undistributed equity in earnings of subsidiary 2,561 2,951 (3,085) - ----------------------------------------------------------------------------------------- Net Income $4,172 $4,511 $ 4,157 - -----------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
For years ended December 31, - ---------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Net income $ 4,172 $ 4,511 $ 4,157 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in earnings of subsidiary (2,561) (2,951) 3,085 Other, net 31 (35) (571) - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,642 1,525 6,671 - ---------------------------------------------------------------------------------------------- Investing Activities: Investments in subsidiaries 0 0 (5,790) - ---------------------------------------------------------------------------------------------- Net cash used in financing activities 0 0 (5,790) - ---------------------------------------------------------------------------------------------- Financing Activities: Cash Dividends (2,023) (1,863) (1,787) Proceeds from exercise of stock options 219 9 0 Proceeds from issuance of common stock 320 271 269 - ---------------------------------------------------------------------------------------------- Net cash used in financing activities (1,484) (1,583) (1,518) - ---------------------------------------------------------------------------------------------- Increase (decrease) in cash 158 (58) (637) Cash and cash equivalents at the beginning of year 195 253 890 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of year $ 353 $ 195 $ 253 - ----------------------------------------------------------------------------------------------
51 [LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 13: DIVIDENDS AND OTHER RESTRICTIONS Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the subsidiary bank for the future payment of dividends to the Corporation. A dividend may not be paid if it would impair the Bank's capital. Furthermore, prior approval by the Comptroller of the Currency is required if the total of dividends declared in a calendar year exceeds the total of the Bank's net profits for that year combined with its retained profits for the two preceding years. At December 31, 1998, $4,146,000 was available for the payment of dividends. NOTE 14: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Corporation has outstanding commitments and contingent liabilities such as commitments to extend credit, including loan commitments of $43,754,000 ($39,054,000 subject to variable rate indices and $4,700,000 fixed rate commitments) as of December 31, 1998. Standby letters of credit, which are not reflected in the accompanying consolidated financial statements, totaled $6,731,000 and $8,190,000 as of December 31, 1998 and 1997, respectively. Commitments to extend credit and standby letters of credit generally do not exceed one year. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Corporation's level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument. The Corporation controls credit risk of these financial instruments through credit approvals, limits and monitoring procedures. To minimize potential credit risk the Corporation generally requires collateral and other credit related terms and conditions from the customer. In the opinion of management the financial condition of the Corporation will not be materially affected by the final outcome of these commitments and contingent liabilities. A substantial portion of the Bank's loans are one to four family residential first mortgage loans secured by real estate located in New Jersey. Accordingly, the collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in the real estate market. Noninterest expenses include rentals for premises and equipment of $264,825 in 1998, $203,168 in 1997, and $135,068 in 1996. At December 31, 1998, Center Bancorp Inc. and its subsidiary were obligated under a number of non-cancelable leases for premises and equipment, many of which provide for increased rentals based upon increases in real estate taxes and the cost of living index. These leases, most of which have renewal provisions, are principally operating leases. Minimum rentals under the terms of these leases for the years 1999 through 2003 are $263,779, $266,896, $270,138, $278,280, and $304,144 respectively. Minimum rentals due 2004 and after are $508,192. 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. 52 NOTE 15: QUARTERLY FINANCIAL INFORMATION CENTER BANCORP INC. (unaudited)
1998 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - -------------------------------------------------------------------------------------------------------------- Total interest income $ 7,676 $ 7,758 $ 7,727 $ 7,525 Total interest expense 3,125 3,406 3,577 3,465 Net interest income 4,551 4,352 4,150 4,060 Provision for loan losses 30 30 30 30 Other income 280 262 206 223 Other expense 3,130 3,101 2,843 2,577 Income before income taxes 1,671 1,483 1,483 1,676 Net income 1,104 979 956 1,133 Earnings per share: Basic $ .31 $ .27 $ .27 $ .32 Diluted $ .31 $ .27 $ .26 $ .32 Weighted average common shares outstanding; Basic 3,576,174 3,570,300 3,558,008 3,548,681 Diluted 3,606,810 3,597,831 3,594,115 3,591,299 - --------------------------------------------------------------------------------------------------------------
1997 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - -------------------------------------------------------------------------------------------------------------- Total interest income $ 7,708 $ 7,899 $ 7,736 $ 7,362 Total interest expense 3,590 3,812 3,696 3,389 Net interest income 4,118 4,087 4,040 3,973 Provision for loan losses 0 0 0 0 Other income 573 193 176 169 Other expense 2,536 2,872 2,716 2,471 Income before income taxes 2,155 1,408 1,500 1,671 Net income 1,409 916 946 1,240 Earnings per share: Basic $ .40 $ .26 $ .27 $ .35 Diluted $ .39 $ .26 $ .26 $ .35 Weighted average common shares outstanding: Basic 3,540,407 3,536,414 3,533,811 3,524,612 Diluted 3,584,661 3,584,475 3,569,120 3,542,409 - --------------------------------------------------------------------------------------------------------------
53 INDEPENDENT AUDITORS' REPORT [GRAPHIC OMITTED] The Board of Directors and Stockholders Center Bancorp Inc.: We have audited the accompanying consolidated statements of condition of Center Bancorp Inc. and subsidiary as of December 31, 1998 and 1997, 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, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Center Bancorp Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. [GRAPHIC OMITTED] Short Hills, New Jersey January 27, 1999 54 [LOGO] Corporate Headquarters Center Bancorp Inc. 2455 Morris Avenue Union, NJ 07083 1-800-862-3683 Annual Shareholders' Meeting The annual shareholders' meeting of Center Nancorp Inc. will be held at 7:00 P.M. on Tueday, April 13, 1999 at Suburban Golf Club, 1730 Morris Avenue, Union, New Jersey. Dividend Reinvestment and Stock Purchase Plan Center Bancorp Inc. offers its shareholders a convenient plan to increase their investment in the Company. Through the Dividend Reinvestment and Stock Purchase Plan, holders of stock may have their quarterly dividends automatically reinvested in additional common shares without brokerage fees, commissions or service charges. Shareholders not enrolled in this plan, as well as brokers and custodians who hold stock in Center Bancorp Inc. may enroll in the plan by contacting Anthony C. Weagley, Vice President and Teasurer, 1-800-862-3683. Financial Information and Form 10K Persons may obtain a copy, free of charge, of the Center Bancorp Inc. 1998 Annual Report and Form 10K (excluding exhibits) as filed with the Securities and Exchange Commission. Investors, Security Analysts and others desiring financial information or a copy of such report should contact: Anthony C. Weagley Vice President and Treasurer 1-800-862-3683 Shareholder Inquiries For information regarding your shares of common stock of Center Bancorp Inc., please contact: Anthony C. Weagley Vice President and Treasurer 1-800-862-3683 Stock Listing NASDAQ National Market - CNBC Center Bancorp Inc. Common Stock is traded on the NASDAQ National Market System under the Symbol CNBC Registrar and Transfer Agent American Stock Transfer and Trust Co. 40 Wall Street New York, New York 10005 [GRAPHIC OMITTED] LOCATIONS Union Springfield Main Office Springfield Banking Center 2455 Morris Avenue 783 Mountain Avenue Union, NJ 07083 Springfield, NJ 07081 (908) 688-9500 Lobby, Drive-Up, and ATM Lobby, Drive-Up and ATM Center Office 2003 Morris Avenue Berkeley Heights Union, NJ 07083 Berkeley Heights Banking Center Lobby and ATM 512 Spingfield Avenue Berkeley Heights, NJ 07922 Stowe Street Lobby, Drive-Up and ATM 2022 Stowe Street Union, NJ 07083 Cranford Drive-Up, Walk-Up and ATM Union County College Campus 1033 Springfield Avenue Five Points Cranford, NJ 07016 356 Chestnut Street ATM Union, NJ 07083 Lobby, Drive-Up and ATM Madison Madison Banking Center Career Center 300 Main Street Union High School Madison, NJ 07940 North Third Street Lobby, Drive-Up and ATM Union, NJ 07083 Lobby Morristown Morristown Banking Center Auto Banking Center 84 South Street Bonnel Court Morristown, NJ 07960 Union, NJ 07083 Lobby and ATM Drive-Up, Walk-Up and ATM Vauxhall Union Hospital Millburn Mall Banking Center 1000 Galloping Hill Road 2933 Vauxhall Road Union, NJ 07083 Vauxhall, NJ 07088 ATM Lobby and ATM 56 -----END PRIVACY-ENHANCED MESSAGE-----