-----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, Rrmlegw+EUUrrj9R1sl6lTZhu6M0R7VMTHOpj4VGxjugUbHxkRjlpODfl5dUiJzZ 2B8kP3eY2RsLPp1aaiL8sA== 0000950116-00-000670.txt : 20000331 0000950116-00-000670.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950116-00-000670 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTER BANCORP INC CENTRAL INDEX KEY: 0000712771 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 521273725 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11486 FILM NUMBER: 584148 BUSINESS ADDRESS: STREET 1: 2455 MORRIS AVE CITY: UNION STATE: NJ ZIP: 07083 BUSINESS PHONE: 9086889500 MAIL ADDRESS: STREET 1: 2455 MORRIS AVE CITY: UNION STATE: NJ ZIP: 07083 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 Form 10-K (Mark One) X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999. Transition Report Pursuant to Section 13 or 15(d) of the Securities - ---- Exchange Act of 1934. for the transition period from to . Commission File Number 2-81353 ----- ------ CENTER BANCORP, INC. ---------------------------------------------------------- (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. YesX or No_ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 5-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K .X Aggregate Market value of voting stock held by non-affiliates based on the average of Bid and Asked prices on February 29, 2000 was approximately $54.2 Million. Shares outstanding on February 29, 2000 - --------------------------------------- Common stock no par value 3,794,477 shares Parts of Form 10-K in which Documents Incorporated by reference document is incorporated Definitive proxy statement dated March 17, 2000 in connection with the 2000 Annual Stockholders Meeting filed with the Commission pursuant to Regulation 14A.......................................... Part III Annual Report to Stockholders for the fiscal year ended December 31, 1999............................ Part I and Part II INDEX TO FORM 10-K PART I ITEM 1 BUSINESS 1 ITEM 2 PROPERTIES 9-10 ITEM 3 LEGAL PROCEEDINGS 10 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT 10 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 11 ITEM 6 SELECTED FINANCIAL DATA 11 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 11 PART III ITEM 10 DIRECTORS OF THE REGISTRANT 12 ITEM 11 EXECUTIVE COMPENSATION 12 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 12 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 13-14 SIGNATURES 15 Center Bancorp, Inc. Form 10 K Part I Item I-Business A) Historical Development Of Business Center Bancorp, Inc., a one-bank holding company, was incorporated in the state of New Jersey on November 12, 1982. Center Bancorp, Inc. commenced operations on May 1, 1983, upon the acquisition of all outstanding shares of The Union Center National Bank (the "Bank"). The holding company's sole activity, at this time, is to act as a holding company for the Bank. As used herein, the term "Corporation" shall refer to Center Bancorp, Inc. and its subsidiary and the term "Parent Corporation" shall refer to Center Bancorp, Inc. on an unconsolidated basis. The Bank was organized in 1923 under the law of the United States of America. The Bank operates five offices in Union Township, Union County, New Jersey, one office in Summit, Union County, New Jersey, one office in Springfield Township, Union County, New Jersey, one office in Berkeley Heights, Union County, New Jersey, one office in Madison, Morris County, New Jersey and one office in Morristown, Morris County, New Jersey and currently employs 162 full time equivalent persons. The Bank is a full service commercial bank offering a complete range of individual and commercial services. On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA ("Lehigh"), a New Jersey chartered savings & loan association, in a transaction accounted for under the purchase method of accounting. At June 28, 1996, Lehigh Savings Bank SLA had assets of $70.9 million (primarily cash and cash equivalents of $53.0 million and loans of $15.0 million), deposits of $68.2 million and stockholders' equity of $2.7 million. The Corporation paid a total of $5.5 million in cash for Lehigh resulting in goodwill of $3.8 million. The goodwill is being amortized on a straight-line basis over 15 years. The consolidated financial statements of the Corporation include the assets, liabilities, and results of operations of Lehigh since the acquisition date. B)Narrative Description Of Business The Bank offers a broad range of lending, depository and related financial services to commercial, industrial and governmental customers. In 1999, the Bank obtained full trust powers enabling it to offer a variety of trust services to its customers. In the lending area, these services include short and medium term loans, lines of credit, letters of credit, working capital loans, real estate construction loans and mortgage loans. In the depository area, the Bank offers demand deposits, savings accounts and time deposits. In addition, the Bank offers collection services, wire transfers, night depository and lock box services. The Bank offers a broad range of consumer banking services, including interest bearing and non-interest bearing checking accounts, savings accounts, money market accounts, certificates of deposit, IRA accounts, Automated Teller Machines ("ATM") accessibility using Money AccessTM service, secured and unsecured loans, mortgage loans, home equity lines of credit, safe deposit boxes, Christmas club accounts, vacation club accounts, collection services, money orders and traveler's checks. The Bank offers various money market services. It deals in U.S. Treasury and U.S. Governmental agency securities, certificates of deposits, commercial paper and repurchase agreements. Competitive pressures affect the Corporation's manner of conducting business. Competition stems not only from other commercial banks but also from other financial institutions such as savings banks, savings and loan associations, mortgage companies, leasing companies and various other financial service and advisory companies. Many of the financial institutions operating in the Corporation's primary market are substantially larger and offer a wider variety of products and services than the Corporation. The Parent Corporation is subject to regulation by the Board of Governors of the Federal Reserve System and the New Jersey Department of Banking. As a national bank, the Bank is subject to regulation and periodic examination by the Comptroller of the Currency. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC"). 1 The Parent Corporation is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). In addition, the Federal Reserve Board makes periodic examinations of bank holding companies and their subsidiaries. The Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5 percent of the voting shares of such bank. The Act also restricts the types of businesses and operations in which a bank holding company and its subsidiaries may engage. The operations of the Bank are subject to requirements and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. Approval of the Comptroller of the Currency is required for branching, bank mergers in which the continuing bank is a national bank and in connection with certain fundamental corporate changes affecting the Bank. Federal law also limits the extent to which the Parent Corporation may borrow from the Bank and prohibits the Parent Corporation and the Bank from engaging in certain tie-in arrangements. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the bank regulatory provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among other things, FDICIA requires federal banking agencies to broaden the scope of regulatory corrective action taken with respect to banks that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. Under FDICIA, federal banking agencies have established five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". Under regulations adopted under these provisions, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10 percent, a Tier I risk-based capital ratio of at least 6 percent and a Tier I leverage ratio of at least 5 percent and not be subject to any specific capital order or directive. For an institution to be adequately capitalized, it must have a total risk-based capital ratio of at least 8 percent, a Tier I risk-based capital ratio of at least 4 percent and a Tier I leverage ratio of at least 4 percent (or in some cases 3 percent). Under the regulations, an institution will be deemed to be undercapitalized if the bank has a total risk-based capital ratio that is less than 8 percent, a Tier I risk-based capital ratio that is less than 4 percent or a Tier I leverage ratio of less than 4 percent (or in some cases 3 percent). An institution will be deemed to be significantly undercapitalized if the bank has a total risk-based capital ratio that is less than 6 percent, a Tier I risk-based capital ratio that is less than 3 percent, or a Tier I leverage ratio of less than 3 percent and will be deemed to be critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2 percent. FDICIA also directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, a maximum ratio of classified assets to capital, a minimum ratio of market value to book value for publicly traded shares (if feasible) and such other standards as the agency deems appropriate. FDICIA also contains a variety of other provisions that could affect the operations of the Corporation, including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, the requirement that depository institutions give 90 days notice to customers and regulatory authorities before closing any branch, limitations on credit exposure between banks, restrictions on loans to a bank's insiders and guidelines governing regulatory examinations. 2 BIF Premiums and Recapitalization of SAIF The Corporation is a member of the Bank Insurance Fund ("BIF") of the FDIC. The FDIC also maintains another insurance fund, the Savings Association Insurance Fund ("SAIF"), which primarily covers savings and loan association deposits but also covers deposits that are acquired by a BIF-insured institution from a savings and loan association ("Oakar deposits"). The Corporation had approximately $385.3 million of deposits at December 31, 1999, with respect to which it pays SAIF FICO Assessments. The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act") signed into law on September 30, 1996, included the Deposit Insurance Funds Act of 1996 (the "Funds Act") under which the FDIC was required to impose special assessments on SAIF-assessable deposits to recapitalize the SAIF. Under the Funds Act, the FDIC also changed assessments for SAIF and BIF deposits in a 5 to 1 ratio to pay Financing Corp. ("FICO") bonds until January 1, 2000. A FICO rate of approximately 1.29 basis points was charged on BIF deposits, and approximately 6.44 basis points was on SAIF deposits. The Gramm-Leach-Bliley Act Of 1999 On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "Act") which among other things, permits qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. A qualifying national bank also may engage subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development, and real estate investment, through a financial subsidiary of the bank. Proposed Legislation From time to time proposals are made in the U.S. Congress and before various bank regulatory authorities which would alter the policies of and place restrictions on different types of banking operations. It is impossible to predict the impact, if any, of potential legislative trends on the business of the Corporation and the Bank. C) Dividend Restrictions Most of the revenue of the Corporation available for payment of dividends on its capital stock will result from amounts paid to the Parent Corporation by the Bank. There are a number of statutory and regulatory restrictions applicable to the payment of dividends by national banks and bank holding companies. First, the Bank must obtain the approval of the Comptroller of the Currency (the "Comptroller") if the total dividends declared by the Bank in any year will exceed the total of the Bank's net profits (as defined and interpreted by regulation) for that year and retained profits (as defined) for the preceding two years, less any required transfers to surplus. Second, the Bank cannot pay dividends except to the extent that net profits then on hand exceed statutory bad debts. Third, the authority of federal regulators to monitor the levels of capital maintained by the Corporation and the Bank (see Item 7 of this Annual Report on Form 10-K and the discussion of FDICIA above), as well as the authority of such regulators to prohibit unsafe or unsound practices, could limit the amount of dividends which the Parent Corporation and the Bank may pay. Regulatory pressures to reclassify and charge-off loans to establish additional loan loss reserves also can have the effect of reducing current operating earnings and thus impacting an institution's ability to pay dividends. Regulatory authorities have indicated that bank holding companies which are experiencing high levels of non-performing loans and loan charge-offs should review their dividend policies. Reference is also made to Note 13 of the Notes to the Corporation's Consolidated Financial Statements included in the 1999 Annual Report incorporated herein by reference. D) Statistical Information (Reference is also made to Exhibit 13.1 of this Annual Report on Form 10-K) Information regarding interest sensitivity is incorporated by reference to pages 24 through 26 of the 1999 Annual Report to Shareholders (the 1999 Annual Report). Information regarding related party transactions is incorporated by reference to Note 5 of the Notes to the Corporation's Consolidated Financial Statements included in the 1999 Annual Report incorporated herein by reference. 3 The market risk results and gap results noted on pages 24 through 26 of the 1999 Annual Report take into consideration repricing and maturities of assets and liabilities, but fail to consider the interest sensitivities of those asset and liability accounts. Management has prepared for its use an income simulation model to forecast future net interest income, in light of the current gap position. Management has also prepared for its use alternative scenarios to measure levels of net interest income associated with various changes in interest rates. Results have indicated that an interest rate increase of 200 basis points and a decline of 200 basis resulted in an impact on future net interest income which is consistent with target levels contained in the Corporation's Asset/Liability Policy. Management cannot provide any assurances about the actual effect of changes in interest rates on the Corporation's net income. I. Investment Portfolio a) For information regarding the carrying value of the investment portfolio, see pages 39 and 40 of the 1999 Annual Report which is incorporated herein by reference. b) The following table illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for investment securities at December 31, 1999, on a contractual maturity basis.
Obligations Other Securities, of US Obligations Federal Reserve Treasury & of States and Federal Government & Political Home Loan (Dollars in Thousands) Agencies Subdivisions Bank Stock Total - --------------------------------------------------------------------------------------------------------- Due in 1 year or less Amortized Cost $ 98,261 $ 10,118 $ 3,999 $ 112,378 Market Value 92,940 10,114 4,002 107,056 Weighted Average Yield 6.765% 6.308% 6.705% 6.722% Due after one year through five years Amortized Cost $ 87,869 $ 23,202 $ 29,903 $ 140,974 Market Value 85,712 22,960 29,405 138,077 Weighted Average Yield 6.550% 6.586% 6.530% 6.552% Due after five years through ten years Amortized Cost $ 7,596 $ 17,293 $ 498 $ 25,387 Market Value 7,374 16,343 476 24,193 Weighted Average Yield 6.439% 6.783% 6.250% 6.669% Due after ten years Amortized Cost $ 21,564 $ 0 $ 0 $ 21,564 Market Value 20,944 0 0 20,944 Weighted Average Yield 6.645% 0.000% 0.000% 6.645% No Maturity Amortized Cost $ 0 $ 0 $ 6,762 $ 6,762 Market Value 0 0 6,762 6,762 Weighted Average Yield 0.000% 0.000% 6.493% 6.493% - --------------------------------------------------------------------------------------------------------- Total Amortized Cost $ 215,290 $ 50,613 $ 41,162 $ 307,065 Market Value 206,970 49,417 40,645 297,032 Weighted Average Yield 6.654% 6.597% 6.537% 6.629% - ---------------------------------------------------------------------------------------------------------
c) Securities of a single issuer exceeding 10 percent of stockholders' equity amounted to $14.3 million - for 1999 at December 31, 1999 and are listed in the table below:
Aggregate (Dollars in thousands) Issuer Book Value Market Value - --------------------------------------------------------------------------------------------------------- Citi Group $ 4,498 $ 4,392 California Housing Authority $ 4,400 $ 4,095 Federal Home Loan Bank Stock $ 5,423 $ 5,423 - --------------------------------------------------------------------------------------------------------- Total $ 14,321 $ 13,910 - ---------------------------------------------------------------------------------------------------------
For other information regarding the Corporation's investment securities portfolio, see Pages 17, 18, 39 and 40 of the 1999 Annual Report. 4 II. Loan Portfolio The following table presents information regarding the components of the Corporation's loan portfolio on the dates indicated.
Years Ended December 31, ------------------------ (Dollars in thousands) 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------------- Commercial $ 61,861 $ 52,182 $ 39,397 $ 25,950 $ 21,302 Real estate-mortgage 99,800 91,189 88,067 85,994 69,954 Installment and other 7,669 7,060 5,565 6,584 7,012 --------------------------------------------------------------------------------------------------------- Total 169,330 150,431 133,029 118,528 98,268 Less: Unearned discount 241 332 605 698 698 Allowance for loan losses 1,423 1,326 1,269 1,293 1,073 --------------------------------------------------------------------------------------------------------- Net total $ 167,666 $ 148,773 $ 131,155 $ 116,537 $ 96,497 ---------------------------------------------------------------------------------------------------------
Since 1995, demand for the Bank's commercial loan, commercial real estate and real estate mortgage products improved gradually. Business development and marketing programs coupled with positive market trends supported the growth, in 1996, 1997, 1998 and 1999. The Lehigh acquisition also accounted for a portion of 1996 loan growth approximating $15.2 million. The maturities of commercial loans at December 31, 1999 are listed below.
At December 31, 1999, Maturing ---------------------------------------------------------------------- After One Year In One Year Through After (Dollars in thousands) Or Less Five Years Five Years Total - ---------------------- ----------- -------------- ---------- ----- Construction loans $ 284 $ 86 $ 0 $ 370 Commercial real estate loans 1,249 2,305 20,560 24,114 Commercial loans 17,224 7,579 12,574 37,377 ------- ------- ------- ------- Total $18,757 $ 9,970 $33,134 $61,861 ======= ======= ======= ======= Loans with: Fixed rates $ 818 $ 8,177 $33,134 $42,129 Variable rates 17,939 $ 1,793 $ 0 19,732 ------- ------- ------- ------- Total $18,757 $ 9,970 $33,134 61,861 ======= ======= ======= =======
Lending is one of Center Bancorp's primary business activities. The Corporation's loan portfolio consists of both retail and commercial loans, serving the diverse customer base in its market area. In 1999, average total loans comprised 34.1 percent of average interest-earning assets. The Corporation has experienced a compound growth rate in average loans since 1995 of 11.4 percent. Average loans amounted to $160.2 million in 1999 compared with $139.0 million in 1998 and $125.5 million in 1997. The composition of Center Bancorp's loan portfolio continues to change due to the local economy. Factors such as the economic climate, interest rates, real estate values and employment all contribute to these changes. Loan growth has been generated through business development efforts and entry through branching into new markets. Average commercial loans increased approximately $5.9 million or 21.8 percent in 1999 as compared with 1998. The Corporation seeks to create growth in commercial lending by offering customized products, competitive pricing and by capitalizing on the positive trends in its market area. Specialized products are offered to meet the financial requirements of the Corporation's clients. It is the objective of the Corporation's credit policies to diversify the commercial loan portfolio to limit concentrations in any single industry. The Corporation's commercial loan portfolio includes, in addition to real estate development, loans to the manufacturing, services, automobile, professional and retail trade sectors, and to specialized borrowers, including high technology businesses. A large proportion of the Corporation's commercial loans have interest rates which reprice with changes in short-term market interest rates or mature in one year or less. 5 Average mortgage loans, which amounted to $95.3 million in 1999, increased $8.9 million or 10.3 percent as compared with average mortgage loans of $86.4 million in 1998 (which reflected a 7.2 percent increase over 1997). The Corporation's long-term mortgage portfolio includes both residential and commercial financing. Growth during the past two years largely reflected brisk activity in mortgage financing. Although a portion of the Corporation's commercial mortgages adjust to changes in the prime rate, as well as indices tied to 5 year Treasury Notes, most of these loans and residential mortgage loans have fixed interest rates. Residential loans increased steadily in 1995 and in 1996; the increase was attributable to the Lehigh acquisition. During 1998 growth increased as rates stabilized with similar trends experienced during 1999. During 1998 and 1999 growth was affected by refinancing activity, competition among lenders and rising interest rates during the second half of 1999. Average construction loans and other temporary mortgage financing decreased from 1998 to 1999 by $173,000 to $594,000. Such loans increased by $209,000 from 1997 to 1998. The change in construction and other temporary mortgage lending has been generated by the market activity of the Corporation's customers engaging in residential and commercial development throughout New Jersey. Interest rates on such mortgages are generally tied to key short-term market interest rates. Funds are typically advanced to the builder or developer during various stages of construction and upon completion of the project it is contemplated that the loans will be repaid by cash flows derived from the ongoing project. Loans to individuals include personal loans, student loans, and home improvement loans, as well as financing for automobiles and other vehicles. Such loans averaged $7.7 million in 1999, as compared with $7.1 million in 1998 and $5.6 million in 1997. The growth in loans to individuals, during 1999, was buoyed by increases in personal loans, offset in part by sales of student loans and declines in automobile loans. Home equity loans, which the Corporation has been actively promoting since 1994, as well as traditional secondary mortgage loans, have become popular with consumers due to their tax advantages over other forms of consumer borrowing vehicles. Home equity loans and secondary mortgages averaged $27.5 million in 1999, an increase of $6.0 million or 27.9 percent as compared with average home equity loans of $21.5 million in 1998. Interest rates on floating rate home equity loans are generally tied to the prime rate while most other loans to individuals, including fixed rate home equity loans, are medium-term (ranging between one-to-five years) and carry fixed interest rates. At December 31,1999, the Corporation had total lending commitments outstanding of $37.0 million, of which approximately 43.0 percent and 21.1 percent were for commercial loans and commercial real estate and construction loans, respectively. Credit risks are an inherent part of the lending function. The Corporation has set in place specific policies and guidelines to limit credit risks to the degree possible. The following describes the Corporation's credit management policy and describes certain risk elements in its earning assets portfolio. Credit Management. The maintenance of comprehensive and effective credit policies is a paramount objective of the Corporation. Credit procedures are enforced at each individual branch office and are maintained at the senior administrative level as well as through internal control procedures. Prior to extending credit, the Corporation's credit policy generally requires a review of the borrower's credit history, collateral and purpose of each loan. Requests for most commercial and financial loans are to be accompanied by financial statements and other relevant financial data for evaluation. After the granting of a loan or lending commitment, this financial data is typically updated and evaluated by the credit staff on a periodic basis for the purpose of identifying potential problems. Construction financing requires a periodic submission by the borrowers of sales/leasing status reports regarding their projects, as well as, in some cases, inspections of the project sites by independent engineering firms. Advances are normally made only upon the satisfactory completion of periodic phases of construction. Certain lending authorities are granted to loan officers based upon each officer's position and experience. However, large dollar loans and lending lines are reported to and are subject to the approval of the Bank's loan committee and/or board of directors. Loan committees are chaired by either the president or a senior officer of the Bank. 6 The Corporation has established its own internal loan-to-value limits for real estate loans. In general, except as described below, these internal limits are not permitted to exceed the following supervisory limits. Loan Category Loan-to-Value Limit Raw Land 65% Land Development 75% Construction: Commercial, Multifamily *, and other Nonresidential 80% Improved Property 85% Owner-occupied 1 to 4 family and home equity ** * Multifamily construction includes condominiums and cooperatives. ** A loan-to-value limit has not been established for permanent mortgage or home equity loans on owner-occupied, 1 to 4 family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90 percent at origination, an institution is expected to require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral. It may be appropriate in individual cases to originate loans with loan-to-value ratios in excess of the supervisory loan-to-value limits, based on the support provided by other credit factors. The President or Board of Directors must approve such exceptions. These loans must be identified by the Bank as exceptions to the supervisory limits and their aggregate amount must be reported at least quarterly to the Board of Directors. Non-conforming loans should not exceed 100% of capital, or 30% with respect to non 1 to 4 family residential loans. Collateral margin guidelines are based on cost, market, or other appraised value to maintain a reasonable amount of collateral protection in relation to the inherent risk in the loan. This does not mitigate the fundamental analysis of cash flow from the conversion of assets in the normal course of business or from operations to repay the loan. It is merely designed to provide a cushion to minimize the risk of loss if the ultimate collection of the loan becomes dependent on the liquidation of security pledged. The Corporation also seeks to minimize lending risk through loan diversification. The composition of the Corporation's commercial loan portfolio reflects and is highly dependent upon the economy and industrial make-up of the region it serves. Effective loan diversification spreads risk to many different industries, thereby reducing the impact of downturns in any specific industry on overall loan profitability. Weakening credits are monitored through a loan review process which requires that, on a regular basis, a classified loan report is prepared. Classified loans are categorized into one of several categories depending upon the condition of the borrower and the strength of the underlying collateral. "Other assets especially mentioned" is an early warning signal consisting of loans with only modest deficiencies in documentation or with potentially weakening credit features. A consolidated classified loan report is prepared on a monthly basis and is examined by both the senior management of the Bank and the Corporation's Board of Directors. The review of classified loan reports is designed to enable management to take such action as is considered necessary to remedy problems on a timely basis. Regularly scheduled audits performed by the Corporation's internal and external credit review staff further the integrity of the credit monitoring process. Any noted deficiencies are expected to be corrected within a reasonable period of time. Risk Elements. Risk elements include non-performing loans, loans past due ninety days or more as to interest or principal payments but not placed on a non-accrual status, potential problem loans, other real estate owned, net, and other non-performing interest-earning assets. 7 Non-performing and Past Due Loans, OREO. Non-performing loans include non-accrual loans and troubled debt restructurings non-accrual Loans represent loans on which interest accruals have been suspended. It is the Corporation's general policy to consider the charge-off of loans when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Troubled debt restructurings represent loans on which a concession was granted to a borrower, such as a reduction in interest rate which is lower than the current market rate for new debt with similar risks. At December 31, 1999, other real estate owned (OREO) consisted of a closed branch facility with a carrying value of approximately $73,000. Loans accounted for on a non-accrual basis at December 31, 1999, 1998, 1997, 1996, and 1995 are as follows.
(Dollars in thousands) 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------- Mortgage Real Estate $ 269 $ 38 $ 27 $ 298 $ 0 Commercial 0 0 0 0 0 Installment 23 3 0 0 0 -------------------------------------------------------------------------------- Total non-accrual loans $ 292 $ 41 $ 27 $ 298 $ 0 --------------------------------------------------------------------------------
Accruing loans which are contractually past due 90 days or more as to principal or interest payments are as follows:
December 31, ------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------- Commercial $ 0 $ 0 $ 0 $ 11 $ 0 Installment 0 24 73 110 48 ----------------------------------------------------------------------------------- Total $ 0 $ 24 $ 73 $ 121 $ 48 -----------------------------------------------------------------------------------
There were no loans which are "troubled debt restructurings" as of the last day of each of the last five years. In general, it is the policy of management to consider the charge-off of loans at the point that they become past due in excess of 90 days, with the exception of loans that are secured by cash or marketable securities or mortgage loans which are in the process of foreclosure. There were no other known "potential problem loans" (as defined by SEC regulations) as of December 31, 1999 that have not been identified and classified. Classified loans, consisting of other assets especially mentioned and substandard loans, amounted to $2,572,534 and $519,021, respectively, at December 31, 1999. On March 21, 2000, a $500,000 loan classified as substandard at December 31, 1999, was repaid in full by the borrower. At December 31, 1998 these loans amounted to $119,440 and $75,670 respectively. The Corporation has no foreign loans. As of December 31, 1999, $8.6 million of the commercial loan portfolio, or 23.0 percent of $37.4 million, represented outstanding working capital loans to various real estate developers. All but $4.4 million of these loans are secured by mortgages on land and on buildings under construction. III. Allowance for Loan Losses Implicit in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loan losses has been allocated below according to the estimated amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans at December 31, for each of the past five years. The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to total loans. The percentage of loans to total loans is based upon the classification of loans shown on page 5 of this report. 8
Commercial Real Estate Mortgage Installment Unallocated ---------- -------------------- ----------- ----------- Amount Loans to Amount Loans to Amount Loans to Amount Total Loans Total Loans Total Loans (Dollars in thousands) % % - --------------------------------------------------------------------------------------------------------------- 1999 $ 718 36.6 $ 492 58.9 $155 4.5 $ 58 1998 $ 553 34.7 $ 330 60.6 $ 66 4.7 $ 377 1997 $ 498 29.6 $ 262 66.2 $ 56 4.2 $ 453 1996 $ 415 21.9 $ 220 66.1 $ 62 12.0 $ 596 1995 $ 467 21.7 $ 187 71.2 $ 22 7.1 $ 397
Information regarding charge-offs and recoveries is incorporated by reference to page 20 of the 1999 Annual Report. IV. Deposits Information regarding average amounts/rates of deposits is incorporated by reference to pages 26 and 31 of the 1999 Annual Report. Information regarding the amount of time certificates of deposit of $100,000 or more is presented on pages 26, 31, and 32 of the 1999 Annual Report. V. Return on Equity and Assets Information regarding the return on average assets, return on average equity, the equity to assets ratio and dividend payout ratio is incorporated by reference to pages 1 and 13 of the 1999 Annual Report. Return on average assets was 0.92 percent, 0.88 percent and 0.94 percent for the years ended December 31, 1999, 1998 and 1997, respectively. The dividend payout ratio was 47.8 percent, 48.5 percent and 41.3 percent for the years ended December 31, 1999, 1998 and 1997, respectively. Return on tangible average shareholders equity was 13.5 percent in 1999, compared with 12.9 percent for 1998 and 15.9 percent in 1997. Average shareholders equity as a percent of average assets was 7.43 percent, 7.49 percent and 6.65 percent for the years ended December 31, 1999, 1998 and 1997, respectively. VI. Short-term Borrowings Information regarding the amount outstanding of short-term borrowings is incorporated by reference to page 28 of the 1999 Annual Report. ITEM 2-Properties The Bank's operations are located at five sites in Union Township, one in Springfield Township, one in Berkeley Heights, one in Vauxhall and one in Summit , Union County, New Jersey. The Bank also has one site in Madison, and one site in Morristown, Morris County, New Jersey. The principal office is located at 2455 Morris Avenue, Union, Union County, New Jersey. The principal office is a two story building constructed in 1993. Five of the locations are owned by the Bank and six of the locations are leased by the Bank. The lease of the Five Points Branch located at 356 Chestnut Street, Union, New Jersey expires November 30, 2002 and is subject to renewal at the Bank's option. The lease of the Career Center Branch located in Union High School expires December 31, 2002 and is also subject to renewal at the Bank's option and the lease of the Madison office located at 300 Main Street, Madison, New Jersey expires June 6, 2005 and is subject to renewal at the Bank's option. The lease of the Millburn Mall Branch located at 2933 Vauxhall Road, Vauxhall, New Jersey expires February 01, 2003 and is subject to renewal at the Bank's option and the lease of the Morristown office located at 86 South Street, Suite 2A, Morristown, New Jersey expires February 28, 2003 and is subject to renewal at the Bank's option. The lease of the Summit branch located 392 Springfield Avenue, Summit, New Jersey expires March 31, 2009 and is subject to renewal at the Bank's option. (See page the inside of back cover of the 1999 Annual Report for a complete listing of all branches and locations. The Drive In/Walk Up located at 2022 Stowe Street, Union, New Jersey is adjacent to a part of the Main Office facility.) The Bank has two off-site ATM's, one at Union Hospital, 100 Galloping Hill Road, Union, New Jersey and one at Union County College, 1033 Springfield Avenue, Cranford, New Jersey. On November 14, 1999, the Corporation executed a Purchase Agreement with the Town of Morristown , New Jersey in the amount of $751,000 to purchase at public auction property located at 214 South Street, At that date, the Corporation deposited the sum of $50,000 with the Town Officer conducting the Auction. 9 ITEM 3-Legal Proceedings There are no significant pending legal proceedings involving the Parent Corporation or Bank other than those arising out of routine operations. Management does not anticipate that the ultimate liability, if any, arising out of such litigation will have a material effect on the financial condition or results of operations of the Parent Corporation and Bank on a consolidated basis. Such statement constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this statement as a result of various factors, including the uncertainties arising in proving facts within the Judicial System. ITEM 4-Submission of Matters to a Vote of Security Holders The Corporation had no matter submitted to a vote of security holders during the fourth quarter of 1999. ITEM 4 A-Executive Officers The following table sets forth the name and age of each executive officer of the Parent Corporation, the period during which each such person has served as an officer of the Parent Corporation or the Bank and each such person's business experience (including all positions with the Parent Corporation and the Bank) for the past five years:
Name and Age Officer Since Business Experience --------------------------------------------------------------------------------------------------------- John J. Davis 1982 the Parent Corporation President & Chief Executive Officer Age - 57 1977 the Bank of the Parent Corporation and the Bank Anthony C. Weagley 1996 the Parent Corporation Vice President & Treasurer of the Parent Corporation Age - 38 1995 the Bank Senior Vice President & Cashier (1996-Present), 1985 the Bank Vice President & Cashier (1991 - 1996) and Assistant Vice President prior years of the Bank Donald Bennetti 1996 the Parent Corporation: Vice President of the Parent Corporation Age - 56 1990 the Bank Senior Vice President (1997-Present) Vice President (1993-1997) Assistant Vice President (1992-1993) and Assistant Cashier (1990-1992) of the Bank Robert J. Diesner 1998 the Parent Corporation Vice President of the Parent Corporation Age - 52 1996 the Bank Senior Vice President & Senior Loan Officer (1998-Present) Vice President (1997-1998) and Assistant Vice President (1996-1997) of the Bank John F. McGowan 1998 the Parent Corporation Vice President of the Parent Corporation Age - 53 1996 the Bank Senior Vice President ( 1998-Present) and Vice President (1996-1998) of the Bank Lori A. Wunder 1998 the Parent Corporation Vice President of the Parent Corporation Age - 36 1995 the Bank Senior Vice President (1998-Present) Vice President (1997-1998) Assistant Vice President (1996-1997) and Assistant Cashier (1995-1996) of the Bank Julie D'Aloia 1998 the Parent Corporation Secretary of the Parent Corporation Age - 38 1998 the Bank Corporate Secretary and Assistant to the President Assistant Secretary and Assistant To the President (1997-1998) of the Bank
10 Part II ITEM 5-Market Information For the Registrant's Stock and Related Stockholder Matters The information required by Item 5 of Form 10-K appears on page 29 of the 1999 Annual Report and is incorporated herein by reference. As of December 31, 1999 there were 603 holders of record of the Parent Corporation's Common Stock. ITEM 6-Selected Financial Data The information required by Item 6 of Form 10-K appears on pages 1 and 13 of the 1999 Annual Report and is incorporated herein by reference. ITEM 7-Management's Discussion And Analysis of Financial Condition and Results of Operations The information required by Item 7 of Form 10-K appears on pages 14 through 30 of the 1999 Annual Report and is incorporated herein by reference. ITEM 7A-Quantitative and Qualitative Disclosures About Market Risk The information required by Item 7A of Form 10-K appears on pages 24 through 27 of the 1999 Annual Report and is incorporated herein by reference. ITEM 8-Financial Statements and Supplementary Data The information required by Item 8 of Form 10-K appears on pages 32 through 54 of the 1999 Annual Report and is incorporated herein by reference. ITEM 9-Changes In and Disagreements With Accountants on Accounting and Financial Disclosures None 11 Part III ITEM 10-Directors of the Registrant The Corporation responds to this item by incorporating herein by reference the material responsive to such item in the Corporation's definitive proxy statement for its 2000 Annual Meeting of Stockholders. ITEM 11-Executive Compensation The Corporation responds to this item by incorporating herein by reference the material responsive to such item in the Corporation's definitive proxy statement for its 2000 Annual Meeting of Stockholders. ITEM 12-Security Ownership of Certain Beneficial Owners and Management The Corporation responds to this item by incorporating herein by reference the material responsive to such item in the Corporation's definitive proxy statement for its 2000 Annual Meeting of Stockholders. ITEM 13-Certain Relationships and Related Transactions The Corporation responds to this item by incorporating herein by reference the material responsive to such item in the Corporation's definitive proxy statement for its 2000 Annual Meeting of Stockholders. 12 Part IV ITEM 14-Exhibits, Financial Statement Schedules, and Reports on Form 8 -K
Consolidated Statements of Condition at December 31, 1999, and 1998 32 ------------------------------------------------------------------------------------------------------- Consolidated Statements of Income for the years ended December 31, 1999 and 1998 and 1997 33 ------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 34 ------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 35 ------------------------------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 36-53 ------------------------------------------------------------------------------------------------------- Independent Auditors' Report 54 -------------------------------------------------------------------------------------------------------
A2. Financial Statement Schedules All Schedules have been omitted as inapplicable, or not required, or because the required information is included in the Consolidated Financial Statements or the notes thereto. A3. Exhibits 3.1 Certificate of Incorporation of the Registrant is incorporated by reference to exhibit 3.1 to the Registrant's Annual Report on Form 10K for the year ended December 31, 1998. 3.2 By- Laws of the Registrant is incorporated by reference to exhibit 3.2 to the Registrant's Annual Report on Form 10K for the year ended December 31, 1998. 10.1 Employment agreement between the Registrant and Donald Bennetti, dated January 1, 1996, is incorporated by reference to exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 10.2 Employment agreement between the Registrant and John J. Davis is incorporated by reference to exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.3 The Registrant's Employee Stock Option Plan is incorporated by reference to exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.4 The Registrant's Outside Director Stock Option Plan is incorporated by reference to exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 10.5 Supplemental Executive Retirement Plans ("SERPS") are incorporated by reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.6 Executive Split Dollar Life Insurance Plan is incorporated by reference to exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.7 Employment agreement between the Registrant and Anthony C. Weagley, dated as of January 1, 1996 is incorporated by reference to exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.10 Directors' Retirement Plan is incorporated by reference to exhibit 10.10 to the Registrant's Annual Report on Form 10K for the year ended December 31, 1998. 13 10.11 Center Bancorp, Inc. 1999 Stock Incentive Plan. 11.1 Statement regarding computation of per share earnings is omitted because the computation can be clearly determined from the material incorporated by reference in this Report. 13.1 Registrant's Annual Report to Shareholders for the year ended December 31, 1999 (parts not incorporated by reference are furnished for information purposes only and are not to be deemed to be filed herewith.) 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 27.1 Financial Data Schedule B. Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the fourth quarter of 1999. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Center Bancorp Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTER BANCORP INC. /s/ JOHN J. DAVIS ------------------------------------- John J. Davis President and Chief Executive Officer Dated March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, in the capacities described below and on the date indicated above: /s/ CHARLES P. WOODWARD /s/ HUGO BARTH, III - ------------------------------------ ------------------- Charles P. Woodward, Hugo Barth, III Director and Chairman of the Board Director /s/ ROBERT L. BISCHOFF /s/ ALEXANDER BOL - ------------------------------------ ----------------- Robert L. Bischoff Alexander Bol Director Director /s/ BRENDA CURTIS /s/ DONALD G. KEIN - ------------------------------------ ------------------ Brenda Curtis Donald G. Kein Director Director /s/ JOHN J. DAVIS /s/ HERBERT SCHILLER - ------------------------------------ -------------------- John J. Davis Herbert Schiller President and Chief Executive Officer Director and Director /s/ PAUL LOMAKIN, JR. /s/ STANLEY R. SOMMER - ------------------------------------ --------------------- Paul Lomakin, Jr. Stan R. Sommer Director Director /s/ WILLIAM THOMPSON /s/ ANTHONY C. WEAGLEY - ------------------------------------ ---------------------- William Thompson Anthony C. Weagley Director Vice President & Treasurer (Chief Accounting and Financial Officer) 15 EX-10 2 EXHIBIT 10.11 CENTER BANCORP, INC. 1999 STOCK INCENTIVE PLAN SECTION 1. General Purpose of Plan. ----------------------- The name of this plan is the Center Bancorp, Inc. 1999 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Center Bancorp, Inc. (the "Company") and other members of the Group (as defined below) to retain and attract executives and other key employees who contribute to the success of the Company and the Group by their ability and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. SECTION 2. Definitions. ----------- As used in this Plan the following terms have the meanings stated. The singular includes the plural, and the masculine gender includes the feminine and neuter genders, and vice versa, as the context requires. The word "person" includes any natural person and any corporation, firm, partnership or other form of association. (a) "Award Date" means the date on which an Incentive is awarded as specified by the Committee. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (d) "Committee" means a committee of two or more members of the Board, to which the Board has delegated the authority to administer the Plan under Section 3. (e) "Common Stock" means the common stock, no par value, of the Company. (f) "Company" means Center Bancorp, Inc. and any successor thereto. (g) "Disability" means a permanent and total disability as defined in Section 22 of the Code. (h) "Fair Market Value" has the meaning stated in Section 8.12. (i) "Group" means the Company, each parent corporation to the Company, and each of the Company's subsidiaries, as these terms are defined in Sections 424(e) and 424(f) of the Code. 1 (j) "Incentive Stock Option" means a stock option intended to qualify as an incentive stock option under Section 422 of the Code. (k) "Incentives" mean the economic incentives listed in Section 5.04 that may be awarded under this Plan. (l) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or any successor definition adopted by the Commission. (m) "Non-Statutory Stock Option" means any Stock Option other than an Incentive Stock Option. (n) "Outside Director" means a director who (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. (o) "Participant" means an employee or director of any member of the Group to whom an Incentive has been awarded. (p) "Plan" means this Center Bancorp, Inc. 1999 Stock Incentive Plan, as the same may be amended from time to time. (q) "Qualified Person" means a Participant's legal guardian or legal representative or a deceased Participant's heir or legatee who has a legal right to or in respect of an Incentive of that Participant. (r) "Restricted Stock Award" means an award of Shares by the Company to the Participant at a price that may be below Fair Market Value, or without payment to the Company, but which are subject to restrictions on sale and other transfer and are subject to forfeiture. (s) "Share" means a share of Common Stock. (t) "Stock Option" means an Incentive Stock Option or a Non-Statutory Stock Option. 2 SECTION 3. Administration. -------------- 3.01. The Committee. The Plan shall be administered by a Committee consisting of not less than two persons appointed by the Board from among its members. A person may serve on the Committee only if he or she is a Non-Employee Director and an Outside Director. Committee members shall serve at the pleasure of the Board. The Committee shall have the power and authority to grant to eligible employees, pursuant to the terms of the Plan, Stock Options and Restricted Stock Awards. In particular, the Committee shall have the authority: (i) to select the officers and other key employees of the Group to whom Stock Options and/or Restricted Stock Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Statutory Stock Options and Restricted Stock Awards, or a combination of the foregoing, are to be granted hereunder; and (iii) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or Restricted Stock Award and/or the Shares relating thereto). The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Participants. SECTION 4. Eligibility. ----------- 4.01. Designation of Employees. All employees of any member of the Group, including officers and directors who are employees, are eligible to receive Incentives under the Plan. Directors and officers who are not employees of any member of the Group may not receive Incentives under the Plan. 4.02. Participants. The Committee may consider any factor in selecting Participants and in determining the type and amount of their Incentives, including, but not limited to, (a) the current or anticipated financial condition of the Group, (b) the contributions by the Participant to the Group and (c) the other compensation provided to the Participant. The Committee's award of an Incentive to a person in any year shall not require the Committee to award any Incentive to that person in any other year. 3 SECTION 5. Shares Subject to the Plan. -------------------------- 5.01. Number of Shares. Subject to Section 8.07, the aggregate number of Shares which may be issued under the Plan shall not exceed 179,000 Shares. 5.02. Expiration and Cancellation. If an Incentive granted under the Plan expires, is terminated or is otherwise canceled before exercise, that Incentive and the related shares of Common Stock shall not apply toward the limits provided in Section 5.01. If Shares issued or awarded under this Plan are forfeited, canceled, terminated or reacquired by the Company, those forfeited, canceled, terminated or reacquired Shares shall not apply toward the limits provided in Section 5.01 and shall be available again for the grant of Incentives. 5.03. Maintenance of Stock. Shares issued under the Plan shall be authorized and unissued shares or shares of treasury stock. The Company shall always maintain the number of such Shares at least equal to a number of Shares for which Incentives have been granted and remain outstanding and unexercised. 5.04. Types of Incentive. Incentives may be granted in any one or any combination of the following forms: (a) Non-Statutory Stock Options (Section 6); (b) Incentive Stock Options (Section 6); and (c) Restricted Stock Awards (Section 7). SECTION 6. Stock Options. ------------- Each Stock Option granted under this Plan shall be subject to the following terms and conditions: 6.01. Price. The option price per share shall be determined by the Committee; provided, however, that the option price shall not be less than the Fair Market Value on the Award Date of the Common Stock subject to the Stock Option. 6.02. Number. The number of Shares subject to the Stock Option shall be determined by the Committee. 6.03. Duration and time for exercise. The Award Date of a Stock Option shall be the date specified by the Committee, provided that such date shall not be before the date on which the Stock Option is actually awarded. The term of each Stock Option shall be determined by the Committee but shall not exceed ten (10) years from the date of grant. Each Stock Option shall become exercisable at such time or times and in such amount or amounts during its term as shall be determined by the Committee at the time of grant. The Committee may accelerate the exercisability of any Stock Option. Unless otherwise specified by the Committee, once a Stock Option becomes exercisable, whether in full or in part, it shall remain so exercisable until its expiration, forfeiture, termination or cancellation. 4 6.04. Exercise. A Stock Option may be exercised, in whole or in part, by giving written notice to the Company (Attention: Chief Financial Officer) at its principal office or to such transfer agent as the Company may designate. The notice shall identify the Incentive being exercised and shall contain such other information and terms as the Committee may require. The notice shall be accompanied by full payment of the purchase price for the Shares (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, by delivery of previously acquired Shares having a Fair Market Value equal on the date of exercise to the cash exercise price of the Stock Option, or (c) at the discretion of the Committee, by a combination of (a) and (b) above. As soon as practicable after receipt of the written notice, the Company shall deliver to the person exercising the Stock Option one or more certificates for the Shares. 6.05. Incentive Stock Options. Notwithstanding anything in this Plan to the contrary, the following additional provisions shall apply to the grant of Incentive Stock Options: (a) The aggregate Fair Market Value on the Award Date of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all plans of the Group) shall not exceed $100,000; (b) All Incentive Stock Options must be granted within ten (10) years from the date on which the Plan was adopted by the Board; (c) Unless exercised sooner, each Incentive Stock Option shall expire no later than ten (10) years after the Award Date for that Incentive Stock Option; (d) No Incentive Stock Option shall be granted to any Participant who, at the time that option is granted, owns (within the meaning of Section 422 of the Code) stock having more than 10% of the total combined voting power of all classes of stock of the Company or any member of the Group, unless the option price is equal to at least 110% of the Fair Market Value of the Shares subject to the option on the Award Date and the option is not exercisable later than five years from the Award Date; (e) Each Incentive Stock Option agreement referred to in Section 8.05 shall contain or be deemed to contain all provisions required in order to qualify those Stock Options as incentive stock options under Section 422 of the Code, and the provisions of this Plan shall be interpreted and construed to effect such treatment under that Section. 5 SECTION 7. Restricted Stock Awards. ----------------------- Restricted Stock Awards shall be subject to the following terms and conditions: 7.01. Number of Shares. The number of Shares to be issued by the Company to a Participant under a Restricted Stock Award shall be determined by the Committee. 7.02. Sale Price. The Committee shall determine the prices, if any, at which Shares issued under a Restricted Stock Award shall be sold to a Participant, which prices may vary from time to time and among Participants and which may be below the Fair Market Value of Shares at the date of sale. The Shares of restricted stock awarded at a price must be paid for (a) in United States Dollars in cash or by check, (b) at the discretion of the Committee, by delivery of Shares having a Fair Market Value equal on the purchase date to the purchase price or (c) at the discretion of the Committee, by a combination of (a) and (b) above. 7.03. Restrictions. All Shares issued under a Restricted Stock Award shall be subject to such restrictions as the Committee may determine, which may include, but not be limited to, any or all of the following: (a) a prohibition against the sale, transfer, pledge, encumbrance or other disposition of the Shares. Such a prohibition shall lapse at the time or times that the Committee may determine (whether, for example, in annual or more frequent installments, at the time of the death, disability or retirement of the Participant, or otherwise); and (b) a requirement that the Participant forfeit all or any part of those Shares if the Participant's employment is terminated during any period in which those Shares are subject to restrictions or if the Participant fails to satisfy performance criteria approved by the Committee. 7.04. Certificates. Shares issued under a Restricted Stock Award shall be registered in the name of the Participant and held in the custody of the Company until the restrictions thereon lapse. Each certificate for those Shares shall bear a legend in substantially the following form: "The transfer of this certificate and the shares of Common Stock represented by it is subject to the terms and conditions (including conditions of forfeiture) contained in the Center Bancorp, Inc. 1999 Stock Incentive Plan (the "Plan") and an agreement entered into between the registered owner and Center Bancorp, Inc. (the "Company"). Copies of the Plan and agreement are on file in the office of the Secretary of the Company." 7.05. End of Restrictions. After the restrictions have expired, certificates evidencing the Shares shall be delivered to the Participant free of the legend. The Shares, however, shall remain subject to any other restrictions stated in this Plan or in the agreement providing for that Incentive. 6 7.06. Stockholder Rights. Subject to the terms and conditions of the Plan and any other restrictions determined by the Board and set forth in the agreement for the Restricted Stock Award, each Participant who receives Shares under a Restricted Stock Award shall have all of the rights of a stockholder during any period in which the Shares are subject to restrictions, including, but not limited to, the right to vote the Shares. Dividends on the Shares paid in cash or property shall be paid to the Participant. Dividends payable in Shares or other stock, however, shall be paid in restricted Shares subject to all provisions of this Section 7. SECTION 8. General. ------- 8.01. Effective date. This Plan shall be effective as of the date of its approval by the shareholders of the Company. If shareholder approval is not obtained within one year following the date the Plan is adopted by the Board, the Plan and any Incentives awarded thereunder shall be void ab initio. 8.02. Duration. Unless the Plan is terminated earlier, the Plan shall terminate ten (10) years from the date on which the Plan is approved by shareholders of the Company. No Incentive or other rights under the Plan shall be granted thereafter. The Board, without further approval of the Company's stockholders, may at any time before that date terminate the Plan. After termination of the Plan, no further Incentives may be granted under the Plan. Stock Options granted before any such termination shall continue to be exercisable in accordance with the terms of the Option. Restricted Stock Awards granted before any such termination shall continue to vest in accordance with the terms of the Award. 8.03. Non-transferability of Incentives; Exercise by Participant. No Incentive may be sold, pledged, assigned, encumbered, disposed of or otherwise transferred other than by will or the laws of descent and distribution. The Company shall not be required to recognize any attempted disposition by any Participant or Qualified Person. During a Participant's lifetime, such Participant's Stock Options are only exercisable by such Participant. 8.04. Effects of Death, Disability, Termination of Employment. Notwithstanding any provision to the contrary herein or in any Incentive Agreement, the following provisions shall apply with respect to Stock Options held by a Participant at the termination of such Participant's employment with members of the Group in the event that such Participant's employment terminates as a result of death or Disability: (a) If such employment terminates as a result of death, the Participant's estate shall have the right to exercise the Participant's Stock Options for a period ending on the earlier of the expiration dates of such Stock Options or one year from the date of termination of employment, provided that such Stock Options shall be exercisable by such estate only to the extent exercisable on the date of termination of employment. 7 (b) If such employment terminates as a result of Disability, the Participant shall have the right to exercise his Stock Options for a period ending on the earlier of the expiration dates of such Stock Options or one year from the date that the Participant is notified that he will no longer be employed by any member of the Group (the "Notification Date"), provided that such Stock Options shall be exercisable by the Participant after termination of employment only to the extent exercisable on the Notification Date. (c) If such employment terminates for any reason other than death or Disability, the Participant shall have the right to exercise his Stock Options for a period ending on the earlier of the expiration dates of such Stock Options or ninety days from the date of termination of employment, provided that such Stock Options shall be exercisable by the Participant after termination of employment only to the extent exercisable on the date of termination of employment. 8.05. Incentive Agreements. The terms of each Incentive shall be stated in an agreement between the Company and the Participant in a form approved by the Committee. The Participant must execute and deliver the agreement to the Company as a condition to the effectiveness of the Incentive. All such agreements may contain all terms and conditions as the Committee considers advisable that are not inconsistent with the Plan, including, but not limited to, transfer restrictions, rights of first refusal, forfeiture provisions, representations and warranties of the Participant and provisions to ensure compliance with all applicable laws, regulations and rules as provided in Section 8.06. 8.06. Compliance with Law. The Company may determine, in its sole discretion, that it is necessary or desirable to list, register or qualify (or to update any listing, registration or qualification of) any Incentive or the Shares issuable or issued under any Incentive or this Plan on any securities exchange or under any federal or state securities law, or to obtain consent or approval of any governmental body as a condition of, or in connection with, the award of any Incentive, the issuance of Shares under any Incentive or this Plan, or the removal of any restrictions imposed on such Shares. If the Company makes such a determination, the Incentive shall not be awarded or the Shares shall not be issued or the restrictions shall not be removed, as applicable, in whole or in part, unless and until the listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. The Company's obligation to sell or issue Shares under an Incentive is subject to compliance with all applicable laws and regulations. The Committee, in its sole discretion, shall determine whether the sale and issue of Shares is in compliance with all applicable laws and regulations. 8.07. Adjustment. If the outstanding Shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of securities of the Company or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, combination of securities or dividend payable in corporate securities, then an appropriate adjustment shall be made by the Board in the number, kind and/or price of Shares for which Incentives may be granted under the Plan. In addition, the Board shall make appropriate adjustment in the number, kind and/or price of Shares as to which outstanding Incentives, or portions thereof then unexercised, shall be exercisable. In the event of any such adjustment, the exercise price of any Stock Option, the performance objectives, restrictions or other terms and conditions of any Incentive and the Shares issuable under any Incentive shall be adjusted as and to the extent appropriate, in the sole and absolute discretion of the Board, to provide each Participant with substantially the same relative rights before and after such adjustment to the extent practical. 8 8.08. Withholding. (a) The Company shall have the right to withhold from any payments made under the Plan or to collect as a condition to any award, payment or issuance of Shares under the Plan any taxes required to be withheld by Federal, state or local law. Whenever a Participant is required to pay to the Company an amount required to be withheld under applicable tax laws in connection with a distribution of Shares or upon exercise of a Stock Option, the Participant may satisfy this obligation in whole or in part by electing (the "Election") to have the Company withhold from the distribution that number of Shares having a value equal to the amount required to be withheld. The value of the Shares to be withheld shall be based on the Fair Market Value of the Shares on the date on which the amount of tax to be withheld is determined ("Tax Date"). (b) Each Election must be made before the Tax Date. The Committee may disapprove any Election, may suspend or terminate the right to make Elections, or may provide with respect to any Incentive that the right to make an Election shall not apply to that Incentive. An Election is irrevocable. 8.09. No Right to Continued Employment. No Participant under the Plan shall have any right to continue in the employ of the Company or any member of the Group for any period of time because of his or her participation in the Plan. 8.10. No Right as Stockholder. No Participant or Qualified Person shall have the rights of a stockholder with respect to the Shares covered by an Incentive unless a stock certificate is issued to that person for the Shares. No adjustment shall be made for cash dividends or similar rights for which the record date is before the date on which such stock certificate is issued. 8.11. Amendment of the Plan. The Board may amend the Plan from time to time in such respects as the Board deems advisable. No such amendment, however, shall (a) change or impair an Incentive without the consent of the Participant or Qualified Person holding that Incentive, or (b) without the prior approval of the Company stockholders (i) increase the limits provided in Section 5.01 (except by adjustment under Section 8.07), (ii) change the class of persons eligible to receive Incentives under the Plan, or (iii) make any other change that requires approval of the Company stockholders under applicable law or to preserve the treatment of the Incentive Stock Options as such under Section 422 of the Code. 8.12. Definition of Fair Market Value. Whenever "Fair Market Value" of Common Stock is to be determined for purposes of this Plan, it shall be determined as follows: 9 (a) If the Common Stock is publicly traded at the time Fair Market Value is to be determined under the Plan, "Fair Market Value" shall mean the average of the highest and lowest sales prices on the date of determination on the over-the-counter market as reported by NASDAQ or, if the Common Stock is then traded on a national securities exchange, the average of the highest and lowest sales prices on that date on the principal national securities exchange on which it is so traded; or (b) If the Common Stock is not publicly traded at the time Fair Market Value is to be determined under the Plan, "Fair Market Value" shall be determined in good faith from time to time by the Committee. 8.13. Acceleration; Exercise. Notwithstanding anything to the contrary set forth in the Plan, in the event that (x) the Company should adopt a plan of reorganization pursuant to which (i) it shall merge into, consolidate with, or sell substantially all of its assets to, any other corporation or entity or (ii) any other corporation or entity shall merge into the Company in a transaction in which the Company shall become a wholly-owned subsidiary of another entity, or (y) the Company should adopt a plan of complete liquidation, then (I) all Stock Options granted hereunder shall be fully exercisable upon consummation of such event and (II) the Company may give a Participant written notice thereof requiring such Participant either (a) to exercise his or her Stock Options within thirty days after receipt of such notice, including all installments whether or not they would otherwise be exercisable at that date, (b) in the event of a merger or consolidation in which shareholders of the Company will receive shares of another corporation, to agree to convert his or her Stock Options into comparable options to acquire such shares, (c) in the event of a merger or consolidation in which shareholders of the Company will receive cash or other property (other than capital stock), to agree to convert his or her Stock Options into such consideration (in an amount representing the appreciation over the exercise price of such Stock Options) or (d) to surrender such Stock Options or any unexercised portion thereof. 8.14 Investment Letter. If required by the Committee, each Participant shall agree to execute a statement directed to the Company, upon each and every exercise by such Participant of any Stock Options, that shares issued thereby are being acquired for investment purposes only and not with a view to the distribution thereof, and containing an agreement that such shares will not be sold or transferred unless either (1) registered under the Securities Act of 1933 and all applicable state securities laws, or (2) exempt from such registration in the opinion of Company counsel. If required by the Committee, certificates representing shares of Common Stock issued upon exercise of Stock Options shall bear a restrictive legend summarizing the restrictions on transferability applicable thereto. 8.15. Fractional and Minimum Shares. In no event shall a fraction of a Share be purchased or issued under the Plan without Board approval. The Committee may specify a minimum number of Shares for which each Stock Option must be exercised. 10 8.16. Application of Funds. The proceeds received by the Company from the sale of Shares under the Plan shall be used for general corporate purposes. 8.17. Other Incentives and Plans. Nothing in this Plan shall prohibit any member of the Group from establishing other employee incentives and plans. 8.18. Governing Law. The validity and construction of the Plan and of each agreement evidencing Incentives shall be governed by the laws of the State of New Jersey, excluding the conflict-of-laws principles thereof. 11 EX-13.1 3 EXHIBIT 13.1
For the years ended December 31, -------------------------------- Percent (Dollars in thousands, except per share data) 1999 1998 change - ------------------------------------------------------------------------------------------------------------------- Earnings Net Interest Income $ 19,291 $ 17,113 12.73% Provision for Loan Losses 108 120 -10.00 Other Income 1,089 971 12.15 Other Expenses 13,290 11,651 14.07 Net Income 4,629 4,172 10.95 Cash Dividends Declared $ 2,213 $ 2,023 9.39 - ------------------------------------------------------------------------------------------------------------------- Per Share Data Net Income Basic $ 1.23 $ 1.12 9.82% Diluted 1.22 1.10 10.91 Cash Dividends 0.58 0.52 11.54 Book Value 9.62 9.75 -1.33 Tangible Book Value $ 8.90 $ 8.94 -0.45 - ------------------------------------------------------------------------------------------------------------------- At Year End Bid Ask Bid Ask Market Value Per Common Share $15.00 $15.63 $15.95 $16.55 - ------------------------------------------------------------------------------------------------------------------- At Year End Investment Securities $ 303,940 $ 287,966 5.55% Loans 169,089 150,099 12.65 Assets 509,624 470,134 8.40 Deposits 389,255 377,167 3.20 FHLB Advances 50,000 40,000 25.00 Federal Funds Purchased and Securities Sold Under Agreement to Repurchase 30,752 12,602 144.02 Stockholders Equity $ 36,513 $ 36,631 -0.32 Shares Outstanding 3,794,477 3,757,056 1.00 Financial Ratios Return on Average Assets 0.92% 0.88% - ------------------------------------------------------------------------------------------------------------------- Return on Average Stockholders Equity 12.44% 11.75% Return on Tangible Average Stockholders Equity 13.50% 12.93% - ------------------------------------------------------------------------------------------------------------------- Cash Dividends Declared as a Percent of Net Income 47.81% 48.47% - ------------------------------------------------------------------------------------------------------------------- Average Stockholders Equity as a Percent of Average Total Assets 7.43% 7.49% Tangible Average Stockholders Equity as a Percent of Average Total Assets 6.92% 6.81% - ------------------------------------------------------------------------------------------------------------------- Stockholders Equity as a Percent of Total Assets 7.16% 7.79% Tangible Stockholders Equity as a Percent of Average Total Assets 6.66% 7.09% - ------------------------------------------------------------------------------------------------------------------- Average Risk-Based Tier I Capital Ratio 15.44% 15.03% Average Risk-Based Tier I and Tier II Capital 16.06% 15.64% Tier I Leverage Ratio 6.93% 6.93% - -------------------------------------------------------------------------------------------------------------------
All share and per share amounts have been restated to reflect the 5% stock dividend distributed on June 1, 1999 to stockholders of record May 18, 1999 and the 3-for-2 stock split distributed May of 1998. 12 LOGO Center Bancorp, Inc. Summary of Selected Statistical Information and Financial Data
Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Summary of Income Interest income $ 32,092 $ 30,686 $ 30,706 $ 26,430 $ 21,749 Interest expense 12,801 13,573 14,487 11,586 8,787 Net interest income 19,291 17,113 16,219 14,844 12,962 Provision (credit) for loan losses 108 120 0 (132) 0 Net interest income after provision (credit) for loan losses 19,183 16,993 16,219 14,976 12,962 Other income 1,089 971 1,111 727 732 Other expense 13,290 11,651 10,596 9,910 8,138 Income before income tax expense 6,982 6,313 6,734 5,793 5,556 Income tax expense 2,353 2,141 2,223 1,636 1,516 Net income $ 4,629 $ 4,172 $ 4,511 $ 4,157 $ 4,040 - ---------------------------------------------------------------------------------------------------------------------- Statement of Financial Condition Data Investments $ 303,940 $ 287,966 $ 298,298 $ 280,123 $ 209,692 Total loans 169,089 150,099 132,424 117,830 97,570 Total assets 509,624 470,134 473,112 459,218 347,777 Deposits 389,255 377,167 436,010 426,654 295,666 Stockholders' equity $ 36,513 $ 36,631 $ 33,422 $ 30,213 $ 27,679 - ---------------------------------------------------------------------------------------------------------------------- Dividends Cash dividends $ 2,213 $ 2,023 $ 1,863 $ 1,787 $ 1,775 Dividend payout ratio 47.8% 48.5% 41.3% 43.0% 43.9% - ---------------------------------------------------------------------------------------------------------------------- Cash Dividends Per Share Cash dividends $ 0.58 $ 0.52 $ 0.50 $ 0.48 $ 0.48 - ---------------------------------------------------------------------------------------------------------------------- Earnings Per Share Basic $ 1.23 $ 1.12 $ 1.22 $ 1.13 $ 1.10 Diluted $ 1.22 $ 1.10 $ 1.21 $ 1.13 $ 1.10 - ---------------------------------------------------------------------------------------------------------------------- Weighted Average Common Shares Outstanding Basic 3,775,846 3,741,478 3,710,804 3,689,444 3,668,564 Diluted 3,799,680 3,777,390 3,738,236 3,698,708 3,668,564 - ---------------------------------------------------------------------------------------------------------------------- Operating Ratios Return on average assets 0.92% 0.88% 0.94% 1.00% 1.15% Return on tangible average equity 13.50% 12.93% 15.92% 15.21% 15.32% - ---------------------------------------------------------------------------------------------------------------------- Book Value Book value per common share $ 9.62 $ 9.75 $ 8.99 $ 8.17 $ 7.52 Tangible book value per common share $ 8.90 $ 8.94 $ 8.08 $ 7.17 $ 7.52 - ---------------------------------------------------------------------------------------------------------------------- Non-Financial Information Common stockholders 603 606 609 633 629 Staff--Full time equivalent 162 153 140 151 132 - ----------------------------------------------------------------------------------------------------------------------
Footnote: All share and per share amounts have been restated to reflect the 5 percent stock dividend distributed June 1, 1999 to stockholders of record May 18, 1999 and the 3-for-2 stock split distributed in May of 1998, and all prior stock dividends and splits. 13 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS The following introduction to Management's Discussion and Analysis highlights the principal activities of Center Bancorp, Inc. that have contributed to its earnings performance in 1999. Center Bancorp's performance for 1999 was highlighted by loan growth, in the commercial, mortgage and consumer loan portfolios, with consistent asset quality. Commensurate with the growth in the loan portfolio, the Corporation recorded a $108,000 provision for loan losses during 1999. As a result of consistent earnings and capital growth, dividends were increased on September 2, 1999 to $.15 per share from the then current rate of $.143 per share or an increase of 5 percent. Furthermore, the Board of Directors declared a five percent stock dividend. The dividend was distributed in June of 1999, and represented the fourth consecutive year that Center Bancorp, Inc. has either paid a stock dividend or declared a stock split. 1999 represented another year of solid earnings. Net income for the year ended December 31, 1999, amounted to $4,629,000 as compared to $4,172,000 and $4,511,000 earned in 1998 and 1997, respectively. Basic earnings per share for 1999 amounted to $1.23 as compared to $1.12 and $1.22 earned in 1998 and 1997, respectively. Diluted earnings per share were $1.22 for 1999 compared to $1.10 in 1998 and $1.21 in 1997. These figures have been restated to reflect the 5% Stock Dividend distributed June 1, 1999, the three-for-two stock split distributed in 1998 and the 5% stock dividend distributed in 1997. Earnings performance for 1999 reflected increased net interest income, offset in part by an increase in operating expenses. These expenses were a direct result of the growth and expansion of Union Center National Bank (the "Bank"). Net interest income increased primarily as a result of a change in the asset mix and more importantly, a positive change in the funding mix coupled with lower rates paid on deposits and borrowings. The Corporation's total assets at December 31, 1999 amounted to $509.6 million, increasing $39.5 million or 8.4 percent from December 1998 levels. The return on average assets was 0.92 percent in 1999, as compared with 0.88 percent and 0.94 percent in 1998 and 1997, respectively. A continuing key element of the Corporation's consistent performance is its strong capital base. The Corporation's risk-based capital ratios at December 31, 1999 were 15.4 percent for Tier I capital and 16.1 percent for total risk-based capital. These ratios substantially exceed the minimum of 4 percent for Tier I capital and 8 percent for total capital under regulatory guidelines. From a performance viewpoint, return on tangible average shareholders' equity was 13.5 percent in 1999, compared with 12.9 percent for 1998 and 15.9 percent in 1997. The following sections discuss the Corporation's Results of Operations, Asset and Liability Management, Liquidity and Capital Resources. RESULTS OF OPERATIONS The most significant component of Center Bancorp's earnings is net interest income, which is the difference between the interest earned on the portfolio of earning assets (principally investments and loans) and the interest paid for deposits and short-term borrowings which support these assets. Net interest income is directly affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities which support those assets, as well as changes in the rates earned and paid. Net interest income is presented in this financial review on a fully tax-equivalent basis, whereby 14 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.
1999 - ---------------------------------------------------------------------------------- Increase (Decrease) From Percent (dollars in thousands) Amount Prior Year Change Amount - ---------------------------------------------------------------------------------- Interest Income: Investments $19,442 $ 230 1.2 $19,212 Loans, including fees 12,198 1,274 11.7 10,924 Federal funds sold and securities purchased under agreement to resell 452 (98) (17.8) 550 - ---------------------------------------------------------------------------------- Total interest income 32,092 1,406 4.6 30,686 - ---------------------------------------------------------------------------------- Interest expense: Certificates $100,000 or more 2,703 (1,598) (37.2) 4,301 Deposits 7,310 (540) ( 6.9) 7,850 Borrowings 2,788 1,366 96.1 1,422 - ---------------------------------------------------------------------------------- Total interest expense 12,801 (772) ( 5.7) 13,573 - ---------------------------------------------------------------------------------- Net interest income * 19,291 2,178 12.7 17,113 Tax-equivalent adjustment 441 80 22.2 361 - ---------------------------------------------------------------------------------- Net interest income on a fully tax-equivalent basis $19,732 $ 2,258 12.9 $17,474 ==================================================================================
1998 1997 - ------------------------------------------------------------------------------------------------- Increase Increase (Decrease) (Decrease) From Percent From Percent (dollars in thousands) Prior Year Change Amount Prior Year Change - ------------------------------------------------------------------------------------------------- Interest Income: Investments $ (966) ( 4.8) $20,178 $ 2,854 16.4 Loans, including fees 944 9.5 9,980 1,355 15.7 Federal funds sold and securities purchased under agreement to resell 2 0.4 548 67 13.9 - ------------------------------------------------------------------------------------------------- Total interest income (20) ( 0.1) 30,706 4,276 16.2 - ------------------------------------------------------------------------------------------------- Interest expense: Certificates $100,000 or more (1,535) (26.3) 5,836 1,723 41.9 Deposits (184) ( 2.3) 8,034 937 13.2 Borrowings 805 130.5 617 241 64.1 - ------------------------------------------------------------------------------------------------- Total interest expense (914) ( 6.3) 14,487 2,901 25.0 - ------------------------------------------------------------------------------------------------- Net interest income * 894 5.5 16,219 1,375 9.3 Tax-equivalent adjustment (120) (25.0) 481 (97) (16.8) - ------------------------------------------------------------------------------------------------- Net interest income on a fully tax-equivalent basis $ 774 4.6 $16,700 $ 1,278 8.3 - -------------------------------------------------------------------------------------------------
* Before the provision for loan losses NOTE: The tax-equivalent adjustment was computed based on an assumed statutory Federal income tax rate of 34 percent. Adjustments were made for interest earned on securities of state and political subdivisions. NET INTEREST INCOME Net interest income on a fully tax-equivalent basis increased $2,258,000 or 12.9 percent to approximately $19.7 million during 1999 from approximately $17.5 million for 1998. The net interest margin increased from 3.92 percent to 4.20 percent for 1999. The change was due to an increased volume of interest-earning assets and a lower cost of funds, reflecting the decrease in short-term interest rates that prevailed throughout most of 1999. Average interest-earning assets for 1999 amounted to $469.7 million compared to $445.3 million for 1998. Average interest-bearing liabilities increased $13.9 million during 1999 to $375.8 million from $361.9 million in 1998. Net average interest-earning assets increased from $83.4 million in 1998 to $93.9 in 1999. The 1999 change in average balances was primarily due to increased volumes of interest-bearing assets, primarily loans. The average yield on interest-earning assets decreased from 6.97 percent in 1998 to 6.93 percent in 1999 while there was a greater decrease in the average cost of interest-bearing liabilities (3.75 percent in 1998 versus 3.41 percent in 1999), reflecting a decrease in short-term interest rates that prevailed through most of 1999. The factors underlying the year-to-year changes in net interest income are reflected in the tables appearing below and on page 16, both of which have been presented on a tax-equivalent basis (assuming a 34 percent tax rate). The table on page 31 (Average Statements of Condition with Interest and Average Rates) shows the Corporation's consolidated average balance of assets, liabilities and 15 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) stockholders' equity, the amount of income produced from interest-earning assets and the amount of expense resulting from interest-bearing liabilities, and net interest income as a percentage of average interest-earning assets. The table presented below (Analysis of Variance in Net Interest Income Due to Volume and Rates) quantifies the impact on net interest income resulting from changes in average balances and average rates over the past three years. Any change in interest income or expense attributable to both changes in volume and changes in rate has been allocated in proportion to the relationship of the absolute dollar amount of change in each category. ANALYSIS OF VARIANCE IN NET INTEREST INCOME DUE TO VOLUME AND RATES
1999/1998 1998/1997 Increase (Decrease) Increase (Decrease) Due to Change in: Due to Change in: - --------------------------------------------------------------------------------------------------------------------------- Average Average Net Average Average Net (dollars in thousands) Volume Rate Change Volume Rate Change - --------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Investment securities: Taxable $ 18 $ 55 $ 73 $ (573) $(126) $ (699) Non-Taxable 282 (45) 237 (345) (42) (387) Federal funds sold and securities purchased under agreement to resell (62) (36) (98) 7 (5) 2 Loans, net of unearned discounts 1,626 (352) 1,274 1,062 (118) 944 - --------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,864 (378) 1,486 151 (291) (140) - --------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Money market deposits 298 74 372 97 117 214 Savings deposits (20) (197) (217) (124) (171) (295) Time deposits (1,463) (803) (2,266) (1,306) (259) (1,565) Other interest-bearing deposits 56 (83) (27) (47) (26) (73) Borrowings 1,426 (60) 1,366 938 (133) 805 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 297 (1,069) (772) (442) (472) (914) - --------------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 1,567 $ 691 $ 2,258 $ 593 $ 181 $ 774 ===========================================================================================================================
Interest income (tax-equivalent) increased by $1,486,000 from 1998 to 1999 and decreased by $140,000 from 1997 to 1998. The primary factor in the increase in interest income during 1999 was the increase in the volume of interest-earning assets offset in part by lower average rates earned on interest-earning assets. The Corporation's loan portfolio increased on average by $21.2 million, primarily as a result of increased volumes of commercial real estate, commercial and home equity loans. This increase was primarily achieved through increased business development and access to new markets. The loan portfolio (traditionally the highest yielding type of interest-earning asset) represented 34.1 percent of the Corporation's interest-earning assets (on average) during 1999 as compared with 31.2 percent of such assets (on average) during 1998. The increased level of interest income generated from the loan portfolio in 1999 was due to increased volume, as the average yield on the Corporation's loans declined by 25 basis points. Investments represented a modest change in the earning-asset mix in 1999. The investment portfolio increased on average by $4.4 million. 16 Within the investment portfolio, the average volume in 1999 increased in taxable securities by $270,000 and in the non-taxable portfolio by $4.1 million compared to 1998. The average yield on the investment portfolio was 6.61 percent in 1999 and 1998. Interest expense decreased during 1999, primarily as a result of a reduction in average rates paid, bolstered by an increase in lower costing short-term borrowings. For the year ended December 31, 1999, interest expense decreased by $772,000 or 5.7 percent as compared with the year ended December 31, 1998. The average cost of funds decreased by 34 basis points, reflecting the decline in interest rates, and changes in the liability mix, (i.e., decreased volumes of more costly interest-bearing time deposits and increased volumes of less costly short-term borrowings). During 1998 interest expense decreased $914,000, or 6.3 percent as compared with 1997. This was primarily a result of decreased deposit volumes, and an increase in lower costing short-term borrowings coupled with lower rates that prevailed. The resulting average cost of funds to the Corporation decreased by 15 basis points. For the three-year period ended December 31, 1999, the Corporation's net interest margin on a tax-equivalent basis (i.e., net interest income on a tax-equivalent basis as a percent of average interest-earning assets) amounted to 4.20 percent in 1999, 3.92 percent in 1998, and 3.75 percent in 1997. The increases noted reflected a widening of spreads between yields earned on loans and investments and rates paid for supporting funds. There was a favorable change in the mix of interest-earning assets, primarily the increased loan volumes. This was sustained by the effects of the change in the mix of interest-bearing liabilities to less costly funding. The rates paid on interest-bearing liabilities averaged 3.41 percent in 1999 compared to 3.75 percent in 1998 and 3.90 percent for 1997. The contribution of non-interest-bearing sources (i.e. the differential between the average rate paid on all sources of funds and the average rate paid on interest-bearing sources) decreased approximately 2 basis points during 1999 from 70 basis points in 1998. During the comparable periods of 1998 and 1997 there was an increase of 6 basis points, from 64 basis points to 70 basis points. This change reflects the ongoing shift in consumer trends and preferences for interest-bearing deposit accounts versus more traditional non-interest deposit accounts. The Corporation's net interest rate spread (i.e., the average yield on average interest-earning assets, calculated on a tax-equivalent basis, minus the average rate paid on interest-bearing liabilities) rose to 3.52 percent in 1999 from 3.22 percent in 1998 and was 41 basis points higher than the 3.11 percent in 1997. The increase in net interest spread during 1999 was primarily a result of the decreased cost of interest-bearing liabilities, offset in part by a decline in rates earned on interest-bearing assets. INVESTMENTS The average volume of investment securities increased by $4.4 million in 1999 as compared to 1998. The tax-equivalent yield on investments remained unchanged at 6.61 percent in 1999 and 1998. The stability in the yield on the investment portfolio in 1999 was achieved through equal or higher market rates on purchases made to replace similar yielding investments which had matured, were prepaid or were called. The impact of repricing activity on yields was lessened by a change in the mix of the portfolio and lengthening of investment maturities, resulting in stable spreads. Securities available-for-sale are a part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. 17 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) At December 31, 1999, the total investment portfolio excluding overnight investments, was $303.9 million, or 64.3 percent of earning-assets, as compared to $288.0 million or 65.7 percent at December 31, 1998. The principal components of the investment portfolio are U.S. Government Treasury and Federal Agency securities. For additional information regarding the Corporation's investment portfolio, see Note 4 to the Consolidated Financial Statements. LOANS Loan growth during 1999 occurred in all principal categories of the loan portfolio. This growth resulted from the Corporation's aggressive marketing and business development programs coupled with new opportunities brought about from expansion of our branch network into new key markets. The decline of yield in the loan portfolio, however, was the result of a lower prime rate environment during the fourth quarter of 1998 and first half of 1999, coupled with a continued competitive rate structure, to attract new loans, in light of growing market competition. To a lesser degree, the affects on additions to the loan portfolio were lessened by continued re-financing activity and by the heightened competition for borrowers that exists in the Corporation's lending markets. The Corporation's desire to continue growing this component of the earning-asset mix is reflected in its current business development plan and marketing plans, as well as its corporate strategic plan. Analyzing the portfolio for the year ended December 31, 1999, average loan volume increased $21.2 million, while the portfolio's average yield decreased 25 basis points as compared with 1998. Total average loan volume increased to $160.2 million with an average yield of 7.61 percent, as compared to $139.0 million with an average yield of 7.86 percent for the year ended December 31, 1998. For additional information regarding loans, see Note 5 to the Consolidated Financial Statements. ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION The purpose of the allowance for loan losses is to absorb the impact of losses inherent in the loan portfolio. Additions to the allowance are made through provisions charged against current operations and through recoveries made on loans previously charged-off. The allowance for loan losses is maintained at an amount considered adequate by management to provide for potential credit losses based upon a periodic evaluation of the risk characteristics of the loan portfolio. In establishing an appropriate allowance, an assessment of the individual borrowers, a determination of the value of the underlying collateral, a review of historical loss experience and an analysis of the levels and trends of loan categories, delinquencies and problem loans are considered. Such factors as the level and trend of interest rates and current economic conditions are also reviewed. At year-end 1999, the level of the allowance was $1,423,000 as compared to a level of $1,326,000 at December 31, 1998. The Corporation had a provision to the allowance for loan losses of $108,000 in 1999, $120,000 in 1998 and none in 1997. At December 31, 1999, the allowance for loan losses amounted to $1,423,000 or 0.84 percent of total loans. In management's view, the level of the allowance at December 31, 1999 is adequate to cover losses inherent in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to increase 18 the allowance based on their analysis of information available to them at the time of their examination. The allowance for loan losses as a percentage of total loans amounted to 0.84 percent, 0.88 percent and 0.96 percent at December 31, 1999, 1998 and 1997, respectively. During 1999 the Corporation did not experience any substantial problems within its loan portfolio. Net charge-offs were $11,000 in 1999, $63,000 in 1998 and $24,000 in 1997. The Corporation had non-accrual loans amounting to $292,000 at December 31, 1999, $41,000 at December 31, 1998, and $27,000 at December 31, 1997. The increase in 1999 was attributable to a residential mortgage loan in the amount of $157,000 and two home equity loans aggregating $112,000. The residential mortgage loan has subsequently become current, while the home equity loans are well secured and in the process of collection. The Corporation continues to aggressively pursue collections of principal and interest on loans previously charged-off. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Impaired loans consist of non-accrual loans and loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are collectively evaluated for impairment. At December 31, 1999, total impaired loans were approximately $519,000, the Corporation did not have any impaired loans at December 31, 1998 or 1997. Although classified as substandard, the impaired loans were current with respect to principal and interest payments. The Corporation's statements herein regarding the adequacy of the allowance for loan losses may constitute forward looking statements under the Private Securities Reform Litigation Act of 1995. Actual results could indicate that the amount of the Corporation's allowance was inadequate. Factors that could cause the allowance to be inaccurate are the same factors that are analyzed by the Corporation in establishing the amount of the allowance. 19 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) FIVE YEAR STATISTICAL ALLOWANCE FOR LOAN LOSSES The following table reflects the relationship of loan volume, the provision and allowance for loan losses and net charge-offs for the past five years.
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Average loans outstanding $ 160,208 $ 138,967 $ 125,476 $107,897 $ 95,216 ======================================================================================================================== Total loans at end of period $ 169,089 $ 150,099 $ 132,424 $117,830 $ 97,570 ======================================================================================================================== Analysis of the Allowance for Loan Losses Balance at the beginning of year $ 1,326 $ 1,269 $ 1,293 $ 1,073 $ 1,073 Charge-offs: Commercial 0 0 2 0 0 Real estate mortgage 0 0 0 470 0 Installment loans 23 70 29 9 10 - ------------------------------------------------------------------------------------------------------------------------ Total charge-offs 23 70 31 479 10 - ------------------------------------------------------------------------------------------------------------------------ Recoveries: Commercial 0 0 0 0 0 Real estate mortgage 0 0 0 132 5 Installment loans 12 7 7 6 5 - ------------------------------------------------------------------------------------------------------------------------ Total recoveries 12 7 7 138 10 - ------------------------------------------------------------------------------------------------------------------------ Net charge-offs: 11 63 24 341 0 ======================================================================================================================== Adjustments from acquisition of Lehigh 0 0 0 693 0 ======================================================================================================================== Provision (credit) for loan losses 108 120 0 (132) 0 ======================================================================================================================== Balance at end of year $ 1,423 $ 1,326 $ 1,269 $ 1,293 $ 1,073 ======================================================================================================================== Ratio of net charge-offs during the year to average loans outstanding during the year 0.01% 0.05% 0.02% 0.32% 0.00% ======================================================================================================================== Allowance for Loan Losses as a percentage of total loans at end of year 0.84% 0.88% 0.96% 1.10% 1.10% ========================================================================================================================
The 1996 charge-off of $470,000 in real-estate mortgage loans occurred on loans acquired from Lehigh, which were subsequently sold. Similarly, the $132,000 loan loss recovery, in 1996, was on a loan that had been previously part of Lehigh's portfolio. ASSET QUALITY The Corporation manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and mix. The Corporation strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values, and to maintain an adequate allowance for loan losses at all times. These practices have protected the Corporation during economic downturns and periods of uncertainty. 20 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) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------- Non-accrual loans $292 $ 41 $ 27 $298 $ 0 Restructured loans 0 0 0 0 0 Accruing loans past due 90 days or more 0 24 73 121 48 Other real estate owned 73 73 0 0 0 - ---------------------------------------------------------------------------------------- Total non-performing assets $365 $138 $100 $419 $ 48 ========================================================================================
Non-accrual loans at December 31, 1999 increased $251,000 over the amount reported at December 31, 1998. The increase in non-accrual loans was attributable to a residential mortgage loan in the amount of $157,000 and two home equity loans aggregating to $112,000. The mortgage loan has been brought current by the borrower, while the home equity loans are well secured and in the process of collection. At December 31, 1999 other than the loans set forth above, the Corporation is not aware of any loans which present serious doubts as to the ability of its borrowers to comply with present loan repayment terms and which are expected to fall into one of the categories set forth in the table above. Other real estate owned (OREO) at December 31, 1999 and 1998, consisted of a closed branch facility with a carrying value of approximately $73,000. NON-INTEREST INCOME The following table presents the principal categories of non-interest income for each of the years in the three year period ended December 31, 1999.
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 % change 1998 1997 % change - --------------------------------------------------------------------------------------------------------------- Other income: Service charges, commissions and fees $ 863 $748 1.54 $748 $ 638 17.2 Other income 228 223 2.2 223 139 60.4 (Loss) gain on securities sold (2) 0 (100.0) 0 334 (100.0) - --------------------------------------------------------------------------------------------------------------- Total other non-interest income $1,089 $971 12.2 $971 $1,111 (12.6) ===============================================================================================================
Total other (non-interest) income, exclusive of (losses)/gains on securities sold, reflects an increase of $120,000 or 12.4 percent in 1999. The primary component of the increase was the rise of fee revenue reflected in service charges, commissions and fees. This increase of $115,000 or 15.4 percent in such fees, was a result of increased fee income derived from ATM fees and deposit account activity. For the 1998 period, total other(non-interest) income, exclusive of gains on securities sold, reflects an increase of $194,000 or 25.0 percent. The primary components of the increase were increased ATM fees and increased fee income derived from checking account activity. 21 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) During 1999 the Corporation sold approximately $3.0 million in securities from its available-for-sale portfolio with a net loss of approximately $2,400. During 1998 the Corporation did not sell any securities from its available-for-sale portfolio. However, during 1997 there were sales from the Corporation's available-for-sale portfolio of approximately $26.2 million, with a net gain of approximately $334,000. These sales were made as part of the Corporation's investment strategy. NON-INTEREST EXPENSE The following table presents the principal categories of non-interest expense for each of the years in the three-year period ended December 31, 1999.
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 % change 1998 1997 % change - --------------------------------------------------------------------------------------------------------------- Other non-interest expense: Salaries and employee benefits $ 6,772 $ 6,005 12.8 $ 6,005 $ 5,487 9.4 Occupancy, net 1,251 1,063 17.7 1,063 1,015 4.7 Premises and equipment 1,348 1,297 3.9 1,297 1,341 (3.3) Stationery and printing 471 438 7.5 438 254 72.4 Marketing and advertising 504 446 13.0 446 337 32.3 Other 2,944 2,402 22.6 2,402 2,162 11.1 - -------------------------------------------------------------------------------------------------------------- Total other non-interest expense $13,290 $11,651 14.1 $11,651 $10,596 10.0 ==============================================================================================================
Total other non-interest expense increased $1,639,000 or 14.1 percent in 1999 as compared to an increase of $1,055,000 or 10.0 percent from 1997 to 1998. The level of operating expenses during 1999 was unfavorably impacted by the overall increase in non-interest expense. While management continues to emphasize expense control, the year to year increases in expense are attributable to the continued expansion of the Bank's facilities, continued investments in technology and the need to attract, develop and retain high-caliber employees. Salaries and employee benefits accounted for 50.9 percent of total other non-interest expense for 1999, as compared to 51.5 percent and 51.8 percent for the years 1998 and 1997, respectively. The Corporation's efficiency ratio (other expenses less non-recurring expenses as a percentage of net interest income on a tax-equivalent basis and other income exclusive of net securities gains/(losses)) was 60.2 percent, 61.8 percent and 56.8 percent respectively, for 1999, 1998 and 1997. The ratio of other expenses to average assets was 2.60 percent in 1999 compared to 2.46 percent in 1998 and 2.21 percent in 1997. The level of operating expenses during 1998 was unfavorably impacted by an increase in all expense categories listed in the table above, except for premises and equipment expenses. The level of operating expenses during 1997 was favorably impacted by lower marketing and advertising expenses, as well as the reduction of stationery and printing expenses. Salaries and employee benefits increased $767,000 or 12.8 percent in 1999, primarily the result of higher staffing levels, increased benefit costs and merit and promotional raises. In 1998 these expenses increased $518,000 primarily due to the increased expense arising from merit and promotional raises and higher benefit costs. Staffing levels overall increased to 162 at December 31, 1999 from 153 full-time equivalent employees at December 31, 1998. Increases in staffing levels were required to support the Bank's expanded branch facilities, specifically in 1999 our newly expanded Springfield 22 Office and new Summit Banking Center. The Corporation continues to ensure that staffing levels are sufficient to meet the Corporation's strategic initiatives and to support providing quality service to our customers. Employees' longevity has continued to play an important part. As of December 31, 1999, the Corporation's employees, excluding officers, have been employed by the Corporation for an average of 229 weeks or 4.4 years. This factor contributes to the Corporation's continued productivity, as evidenced by the ratio of average assets per full time-equivalent employee, which amounted to $3.1 million, $3.1 million and $3.4 million in 1999, 1998 and 1997, respectively. Occupancy and bank premises and equipment expense increased by $239,000 or 10.1 percent in 1999 over 1998. This increase in 1999 expense reflects the ongoing impact on operating costs of expanded facilities. The increase in such expenses of $4,000 or 0.2 percent in 1998 from 1997. Other expenses increased by $542,000 or 22.6 percent in 1999 over 1998. This increase in 1999 expense reflects the legal and consulting costs recognized in 1999 with the formation of a subsidiary and the liquidation of another subsidiary. Telephone, computer and loan operating expenses also increased as a result of the addition and expansion of branch facilities and increased loan volume. INCOME TAXES The Corporation's provision for income taxes decreased from 1998 to 1997 primarily as a result of decreased taxable income and increased from 1998 to 1999 primarily as a result of higher amounts of taxable income. The effective tax rates for the Corporation for the periods ended December 31, 1999, 1998 and 1997 were 33.7 percent, 33.9 percent and 33.0 percent, respectively. The effective tax rate continues to be less than the combined statutory Federal tax rate of 34 percent and the New Jersey State tax rate of 9 percent. The difference between the statutory and effective tax rates primarily reflects the tax-exempt status of interest income on obligations of states and political subdivisions and disallowed expense items for tax purposes, such as travel and entertainment expense, as well as amortization of goodwill. Tax-exempt interest income, on a tax-equivalent basis, increased by $237,000 or 22.3 percent from 1998 to 1999, and declined by $387,000 or 26.7 percent from 1997 to 1998. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133 AND SFAS 137 In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. This Statement was originally effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. Earlier application of all of the provisions of this Statement is encouraged, but is permitted only as of the beginning of any fiscal quarter that begins after issuance of this Statement. This Statement should not be applied retroactively to financial statements of prior periods. 23 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) In June 1999 FASB issued SFAS No 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which amended SFAS No. 133 to be effective for all fiscal years beginning after June 15, 2000. On January 1, 2000 the Corporation adopted SFAS 133 and SFAS 137. The transition provisions contained in SFAS 133 provide that at the date of initial application, an entity may transfer any debt security classified as "held to maturity (HTM)" to "available-for-sale (AFS)" or "trading". On the initial adoption date of SFAS 133 as amended by SFAS 137, the Bank transferred $25,357,952 (amortized cost) of its securities previously classified as held to maturity to the available-for-sale classification. The related unrealized net gain as of transfer date was $5,109, which has been recognized in the comprehensive income component of stockholders' equity, as the cumulative effect of adopting the new accounting principles. YEAR 2000 CENTURY DATE CHANGE As of December 31, 1999 the Corporation believed it was Year 2000 compliant and subsequently did not experience any internal Year 2000 compliance exceptions nor disruptions to operations. The cost of Year 2000 compliance through December 31, 1999 amounted to $443,400, lower than the original estimate of $470,000. ASSET AND LIABILITY MANAGEMENT Asset and Liability management encompasses an analysis of market risk, the control of interest rate risk (interest sensitivity management) and the ongoing maintenance and planning of liquidity and capital. The composition of the Corporation's statement of condition is planned and monitored by the Asset and Liability Committee (ALCO). In general, management's objective is to optimize net interest income and minimize market risk and interest rate risk by monitoring these components of the statement of condition. INTEREST SENSITIVITY MARKET RISK "Market risk" represents the risk of loss from adverse changes in market prices and rates. The Corporation's market rate risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Corporation's profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Corporation's earnings to the extent that the interest rates borne by assets and liabilities do not similarly adjust. The Corporation's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Corporation's net interest income and capital, while structuring the Corporation's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Corporation relies primarily on its asset-liability structure to control interest rate risk. The Corporation continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. The management of the Corporation believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Corporation's yield-cost spread through wholesale and retail growth opportunities. 24 The Corporation monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Corporation's exposure to differential changes in interest rates between assets and liabilities is the Corporation's analysis of its interest rate sensitivity. This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. The primary tool used by management to measure and manage interest rate exposure is a simulation model. Use of the model to perform simulations reflecting changes in interest rates over one and two-year time horizons has enabled management to develop and initiate strategies for managing exposure to interest rate risk. In its simulations, management estimates the impact on net interest income of various changes in interest rates. Projected net interest income sensitivity to movements in interest rates is modeled based on both an immediate rise or fall in interest rates ("rate shock"), as well as gradual changes in interest rates over a 12 month time period. The model is based on the actual maturity and repricing characteristics of interest-rate sensitive assets and liabilities. The model incorporates assumptions regarding earning-asset and deposit growth, prepayments, interest rates and other factors. Management believes that both individually and in the aggregate these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not an absolutely precise calculation of exposure. For example, estimates of future cash flows must be made for instruments without contractual maturity or payment schedules. Based on the results of the interest simulation model as of December 31, 1999, Center Bancorp, Inc. would expect a decrease of 8.90 percent in net interest income and an increase of 7.53 percent in net interest income if interest rates increase or decrease by 200 basis points, respectively, from current rates in an immediate and parallel shock over a twelve month period. Short-term interest rate exposure analysis is supplemented with an interest sensitivity gap model. The Corporation utilizes interest sensitivity analysis to measure the responsiveness of net interest income to changes in interest rate levels. Interest rate risk arises when an earning-asset matures or when its interest rate changes in a time period different from that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different from that of an earning-asset that it supports. While the Corporation matches only a small portion of specific assets and liabilities, total earning assets and interest-bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames. The difference between interest sensitive assets and interest sensitive liabilities is referred to as the interest sensitivity gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities, or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management's judgment as to projected interest rate trends. The Corporation's rate sensitivity position in each time frame may be expressed as assets less liabilities, as liabilities less assets, or as the ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL). For example, a short funded position (liabilities repricing before assets) would be expressed as a net negative position, when period gaps are computed by subtracting repricing liabilities from repricing assets. When using the ratio method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than 1 indicates an asset sensitive position, and a ratio less than 1 indicates a liability sensitive position. A negative gap and/or a rate sensitivity ratio less than 1 tends to expand net interest margins in a falling rate environment and to reduce net interest margins in a rising rate environment. Conversely, when a positive gap occurs, generally margins expand in a rising rate environment and contract in a failing rate environment. 25 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position. At December 31, 1999, the Corporation reflects a negative interest sensitivity gap (or an interest sensitivity ratio) of .40:1.00: at the cumulative one year position. During much of 1999 the Corporation had a negative interest sensitivity gap. The maintenance of a liability-sensitive position during 1999 has had a favorable impact on the Corporation's net interest margins; however, based on management's perception that interest rates will continue to be volatile, emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with the objective of stabilizing the net interest spread during 2000. However, no assurance can be given that this objective will be met. The following table depicts the Corporation's interest rate sensitivity position at December 31, 1999: Expected Maturity/Principal Repayment December 31,
Average Year Year Year Interest End End End (dollars in thousands) Rate 2000 2001 2002 - --------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans 7.61% $ 49,743 $ 15,492 $ 11,593 Investments 6.46% 97,911 52,168 26,598 - ------------------------------------------------------------------------------------------- Total interest-earning assets $ 147,654 $ 67,660 $ 38,191 - ------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Time certificates of deposit of $100,000 or greater 4.95% $ 43,258 $ 270 $ 0 Time certificates of deposit of less than $100,000 4.85% 54,824 2,055 0 Other interest bearing deposits 2.28% 190,301 1,694 1,911 Securities sold under agreements to repurchase and FHLB advances 4.24% 80,752 0 0 - ------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 369,135 $ 4,019 $ 1,911 - ------------------------------------------------------------------------------------------- Cumulative interest-earning assets 147,654 215,314 253,505 Cumulative interest-bearing liabilities 369,135 373,154 375,065 Rate sensitivity gap (221,481) 63,641 36,280 Cumulative rate sensitivity gap $ (221,481) $ (157,840) $ (121,560) - ------------------------------------------------------------------------------------------- Cumulative gap ratio 0.40% 0.58% 0.68% ===========================================================================================
[RESTUBBED TABLE]
Year Year 2005 Estimated End End And Total Fair (dollars in thousands) 2003 2004 Thereafter Balance Value - --------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Loans $ 8,684 $ 7,720 $ 74,434 $ 167,666 $165,371 Investments 27,506 27,040 72,717 303,940 297,032 - -------------------------------------------------------------------------------------------------------- Total interest-earning assets $ 36,190 $ 34,760 $ 147,151 $ 471,606 $462,403 - -------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Time certificates of deposit of $100,000 or greater $ 0 $ 0 $ 113 $ 43,641 $ 43,640 Time certificates of deposit of less than $100,000 0 0 0 56,879 56,857 Other interest bearing deposits 0 0 0 193,906 193,906 Securities sold under agreements to repurchase and FHLB advances 0 0 0 80,752 80,731 - -------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 0 $ 0 $ 113 $ 375,178 $375,134 - -------------------------------------------------------------------------------------------------------- Cumulative interest-earning assets 289,695 324,455 471,606 471,606 Cumulative interest-bearing liabilities 375,065 375,065 375,178 375,178 Rate sensitivity gap 36,190 34,760 147,038 96,428 Cumulative rate sensitivity gap $ (85,370) $ (50,610) $ 96,428 $ 96,428 - -------------------------------------------------------------------------------------------------------- Cumulative gap ratio 0.77% 0.87% 1.26% 1.26% ========================================================================================================
The table above indicates the time period in which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, this table does not necessarily indicate the impact of general interest rate movements on the Corporation's net interest yield because the repricing of various categories of assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. 26 Expected maturities are contractual maturities adjusted for prepayments of principal based on current market indices. The Corporation uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. For deposits, contractual maturities are assumed for certificates of deposit while other interest-bearing deposits were treated as if subject to immediate withdrawal. LIQUIDITY The liquidity position of the Corporation is dependent on successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise principally to accommodate possible deposit outflows and to meet customers' requests for loans. Such needs can be satisfied by scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit in-flows. The objective of liquidity management is to enable the Corporation to maintain sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cashflows, and adjusts positions as necessary to maintain adequate levels of liquidity. By using a variety of potential funding sources and staggering maturities, the risk of potential funding pressure is reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations which could lead to liquidity concerns. The Corporation derives a significant proportion of its liquidity from its core deposit base. At December 31, 1999, core deposits, as defined by the Corporation, (comprised of total demand and savings accounts plus money market accounts under $100,000)represented 61.0 percent of total deposits. More volatile rate sensitive deposits, concentrated in certificates of deposit $100,000 and greater, decreased to 11.2 percent of total deposits from 14.1 percent at December 31, 1998. This change was due to a shift to lower costing and more stable sources of funds, primarily borrowings from the Federal Home Loan Bank of New York and securities sold under agreements to repurchase. The following table depicts the Corporation's core deposit mix at December 31, 1999 and 1998: CORE DEPOSIT MIX
December 31, - -------------------------------------------------------------------------------------------------------------------- 1999 1998 Net Change (dollars in thousands) Amount Percentage Amount Percentage Volume 99 vs. 98 - -------------------------------------------------------------------------------------------------------------------- Demand Deposits $ 94,829 39.8 $ 82,072 37.2 $ 12,757 Interest-Bearing Demand 45,786 19.2 40,579 18.4 5,207 Regular Savings 71,103 29.9 74,123 33.6 (3,020) Money Market Deposits under $100 26,399 11.1 23,776 10.8 2,623 - -------------------------------------------------------------------------------------------------------------------- Total core deposits $ 238,117 100.0 $ 220,550 100.0 $ 17,567 - -------------------------------------------------------------------------------------------------------------------- Total deposits $ 389,255 $ 377,167 $ 12,088 - -------------------------------------------------------------------------------------------------------------------- Core deposits to total deposits 61% 58% ====================================================================================================================
Short-term borrowings can be used to satisfy daily funding needs. Balances in those accounts fluctuate on a day-to-day basis. The Corporation's principal short-term funding sources are securities sold under agreement to repurchase. Average short-term borrowings during 1999 amounted to approximately $19.5 million, an increase of $11.0 million or 130.4 percent from the 1998 period. 27 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) The following table is a summary of securities sold under repurchase agreements for each of the last three years.
December 31, - ------------------------------------------------------------------------------------ (dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------ Securities sold under repurchase agreements: Average Interest rate: At year end 3.09% 3.71% 6.75% For the year 3.24% 3.40% 5.68% Average amount outstanding during the year: $19,484 $ 8,455 $10,858 Maximum amount outstanding at any month end: $30,752 $15,063 $27,320 Amount outstanding at year end: $30,752 $11,602 $ 700 ===================================================================================
CASH FLOWS The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During 1999 cash and cash equivalents (which increased overall by $2.7 million) were provided (on a net basis) by operating and financing activities and used (on a net basis) in investing activities. Cash flows from operating activities, primarily net income, and financing activities, primarily increases in borrowings and deposits, were used in investing activities, primarily the increased volume of loans and investment securities. STOCKHOLDERS' EQUITY Stockholders' equity averaged $37.2 million during 1999, an increase of $1.7 million, or 4.8 percent, as compared to 1998. At December 31, 1999, stockholders' equity totaled $36.5 million, a decrease of $120,000 from December 31, 1998. Such decrease resulted from $3.0 million of net unrealized losses on securities available-for-sale, offset by net increases of $2.8 million attributable to net income and issuance of common stock less cash dividends paid. The Corporation's dividend reinvestment and optional stock purchase plan contributed $318,000 in new capital during 1999. Book value per share at year end 1999 was $9.62 compared to $9.75 at year end 1998. Tangible book value at year end 1999 was $8.90 compared to $8.94 for 1998. CAPITAL The maintenance of a solid capital foundation continues to be a primary goal for the Corporation. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment. RISK-BASED CAPITAL/LEVERAGE At December 31, 1999, the Corporation's total Tier l capital (defined as tangible stockholders' equity for common stock and certain perpetual preferred stock) amounted to $33.4 million or 6.55 percent of total assets. The Tier I leverage capital ratio was 6.93 percent of total average assets. Tier I capital excludes the effect of SFAS No. 115, which amounted to $1,877,000 of net unrealized losses, after tax, on securities available-for-sale (reported as a component of accumulated other comprehensive income which is included in stockholders' equity) and goodwill of $2,736,000 as of December 31, 1999. For information on goodwill, see Note 2 to the Consolidated Financial Statements. 28 United States bank regulators have additionally issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorized assets and off balance-sheet items into four risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. At December 31, 1999, the Corporation's estimated Tier I and total risk-based capital ratios were 15.4 percent and 16.1 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of December 31, 1999. For information on risk-based capital and regulatory guidelines for the Bank, see Note 10 to the Consolidated Financial Statements. SECURITY MARKET INFORMATION The common stock of the Corporation is traded on the NASDAQ Stock Market, effective as of June 24, 1996. The Corporation's symbol is CNBC. As of December 31, 1999, the Corporation had 603 common stockholders of record. This does not include beneficial owners for whom CEDE & Company or others act as nominees. On December 31, 1999, the closing market bid and ask price was $15.00-$15.63, respectively. Since June 24, 1996, prices were reported by NASDAQ. For prior years the high and low bid prices were reported by National Quotation Bureau. The following table sets forth the high and low bid prices, and dividends declared for the Corporation's common stock during the periods indicated.
Common Stock Price Common 1999 1998 Dividends Declared - -------------------------------------------------------------------------------------------------- High Low High Low Bid Bid Bid Bid 1999 1998 - -------------------------------------------------------------------------------------------------- Fourth Quarter $ 15.38 $ 13.00 $ 17.14 $ 15.00 $ 0.150 $ 0.143 Third Quarter $ 14.75 $ 13.25 $ 17.38 $ 14.41 $ 0.143 $ 0.127 Second Quarter $ 15.72 $ 14.13 $ 19.05 $ 17.14 $ 0.143 $ 0.127 First Quarter $ 15.95 $ 14.28 $ 17.45 $ 14.77 $ 0.143 $ 0.127 - -------------------------------------------------------------------------------------------------- $ 0.579 $ 0.524 ==================================================================================================
For information on dividend restrictions and capital requirements which may limit the ability of the Corporation to pay dividends, see Note 13 to the Consolidated Financial Statements. Dividends declared on common stock, (on a per share basis) and stock prices have been adjusted for the 5 percent stock dividend distributed on June 1, 1999, and the three-for-two stock split distributed in May of 1998 and the 5 percent stock dividend distributed in May of 1997. LOOKING FORWARD One of the Corporation's primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation's ability to achieve its objectives: The financial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation's ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace. Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations is mitigated by ALCO strategies, significant changes in interest rates can have an adverse impact on profitability. The ability of customers to repay their obligations is often impacted by changes in the regional and local economy. Although the Corporation sets aside loan loss provisions toward the allowance for loan losses, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance. 29 LOGO Center Bancorp, Inc. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued) Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has already taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to react to future technological changes. Non-historical statements contained in this Annual Report constitute forward looking statements under the Private Securities Litigation Reform Act of 1995. Sometimes these statements contain words such as, "may," "believe," "expect," "continue," "intend," "anticipate," "plan," "seek," "estimate" or other similar words. Actual results could differ materially from those projected in the Corporation's forward-looking statements due to numerous known and unknown risks and uncertainties, including the factors referred to above and in other sections of this Annual Report. 30 AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (tax-equivalent basis) Balance Expense Rate Balance Expense Rate - ------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets: Investment securities:(1) Taxable $281,582 $18,585 6.60% $281,312 $18,512 6.58% Non-taxable 19,128 1,298 6.79% 14,994 1,061 7.08% Federal funds sold and securities purchased under agreement to resell 8,813 452 5.13% 9,986 550 5.51% Loans, net of unearned income:(2) 160,208 12,198 7.61% 138,967 10,924 7.86% - ------------------------------------------------------------------------------------------------------------ Total interest-earning assets: 469,731 32,533 6.93% 445,259 31,047 6.97% - ------------------------------------------------------------------------------------------------------------ Non-interest earning assets: Cash and due from banks 13,798 12,285 Other assets 18,496 17,569 Allowance for possible loan losses (1,359) (1,314) - ------------------------------------------------------------------------------------------------------------ Total non-interest earning assets 30,935 28,540 - ------------------------------------------------------------------------------------------------------------ Total assets $500,666 $473,799 - ------------------------------------------------------------------------------------------------------------ LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: Money market deposits $ 69,831 2,148 3.08% $ 60,061 1,776 2.96% Savings deposits 74,393 1,449 1.95% 75,329 1,666 2.21% Time deposits 122,478 5,676 4.63% 152,749 7,942 5.20% Other interest-bearing deposits 46,378 740 1.60% 43,077 767 1.78% Short term borrowings and FHLB advances 62,713 2,788 4.45% 30,675 1,422 4.64% - ------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 375,793 12,801 3.41% 361,891 13,573 3.75% - ------------------------------------------------------------------------------------------------------------ Non-interest-bearing liabilities: Demand deposits 84,140 72,564 Other non-interest bearing deposits 397 438 Other liabilities 3,138 3,410 - ------------------------------------------------------------------------------------------------------------ Total non-interest bearing liablilities 87,675 76,412 - ------------------------------------------------------------------------------------------------------------ Stockholders' equity 37,198 35,496 - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $500,666 $473,799 - ------------------------------------------------------------------------------------------------------------ Net interest income (tax-equivalent basis) $19,732 $17,474 - ------------------------------------------------------------------------------------------------------------ Net interest spread 3.52% 3.22% - ------------------------------------------------------------------------------------------------------------ Net interest income as percent of earning assets (margin) 4.20% 3.92% - ------------------------------------------------------------------------------------------------------------ Tax-equivalent adjustment (3) (441) (361) - ------------------------------------------------------------------------------------------------------------ Net interest income $19,291 $17,113 ============================================================================================================
[RESTUBBED TABLE]
(dollars in thousands) 1997 - -------------------------------------------------------------------------- Interest Average Income/ Yield/ (tax-equivalent basis) Balance Expense Rate - -------------------------------------------------------------------------- ASSETS Interest-earning assets: Investment securities:(1) Taxable $290,002 $19,211 6.62% Non-taxable 19,847 1,448 7.30% Federal funds sold and securities purchased under agreement to resell 9,866 548 5.55% Loans, net of unearned income:(2) 125,476 9,980 7.96% - ------------------------------------------------------------------------- Total interest-earning assets: 445,191 31,187 7.01% - ------------------------------------------------------------------------- Non-interest earning assets: Cash and due from banks 15,570 Other assets 19,432 Allowance for possible loan losses (1,280) - ------------------------------------------------------------------------- Total non-interest earning assets 33,722 - ------------------------------------------------------------------------- Total assets $478,913 - ------------------------------------------------------------------------- LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing liabilities: Money market deposits $ 56,668 1,562 2.76% Savings deposits 80,635 1,961 2.43% Time deposits 177,739 9,507 5.35% Other interest-bearing deposits 45,687 840 1.84% Short term borrowings and FHLB advances 10,858 617 5.68% - ------------------------------------------------------------------------- Total interest-bearing liabilities 371,587 14,487 3.90% - ------------------------------------------------------------------------- Non-interest-bearing liabilities: Demand deposits 71,974 Other non-interest bearing deposits 364 Other liabilities 3,134 - ------------------------------------------------------------------------- Total non-interest bearing liablilities 75,472 - ------------------------------------------------------------------------- Stockholders' equity 31,854 - ------------------------------------------------------------------------- Total liabilities and stockholders' equity $478,913 - ------------------------------------------------------------------------- Net interest income (tax-equivalent basis) $16,700 - ------------------------------------------------------------------------- Net interest spread 3.11% - ------------------------------------------------------------------------- Net interest income as percent of earning assets (margin) 3.75% - ------------------------------------------------------------------------- Tax-equivalent adjustment (3) (481) - ------------------------------------------------------------------------- Net interest income $16,219 =========================================================================
(1) Average balances for available-for-sale securities are based on amortized cost (2) Average balances for loans include loans on non-accrual status (3) The tax-equivalent adjustment was computed based on a statutory Federal income tax rate of 34 percent. 31 LOGO Center Bancorp, Inc. CONSOLIDATED STATEMENTS OF CONDITION
December 31, - ------------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 3) $ 18,675 $ 15,975 Investment securities held to maturity (approximate market value of $176,542 in 1999 and $174,184 in 1998) 183,450 172,014 Investment securities available-for-sale 120,490 115,952 - -------------------------------------------------------------------------------------------- Total investment securities (Note 4) 303,940 287,966 Loans, net of unearned income (Note 5) 169,089 150,099 Less--Allowance for loan losses (Note 5) 1,423 1,326 - -------------------------------------------------------------------------------------------- Net loans 167,666 148,773 Premises and equipment, net (Note 6) 9,778 9,426 Accrued interest receivable 4,727 4,120 Other assets (Note 9) 2,102 815 Goodwill (Note 2) 2,736 3,059 - -------------------------------------------------------------------------------------------- Total assets $509,624 $470,134 - -------------------------------------------------------------------------------------------- LIABILITIES Deposits: Non-interest bearing $ 94,829 $ 82,072 Interest bearing: Certificates of deposit $100,000 and over 43,641 53,056 Savings and Time Deposits 250,785 242,039 - -------------------------------------------------------------------------------------------- Total Deposits 389,255 377,167 Federal funds purchased and securities sold under agreements to repurchase (Note 7) 30,752 12,602 Federal Home Loan Bank Advances (Note 7) 50,000 40,000 Accounts payable and accrued liabilities (Notes 8 and 9) 3,104 3,734 - -------------------------------------------------------------------------------------------- Total liabilities 473,111 433,503 - -------------------------------------------------------------------------------------------- Commitments and contingencies (Note 14) STOCKHOLDERS' EQUITY (Notes 10 and 13) Common stock, no par value: Authorized 20,000,000 shares; issued 4,253,441 and 4,232,169 shares in 1999 and 1998, respectively 10,760 7,616 Additional paid in capital 3,807 3,660 Retained earnings 25,568 25,978 Treasury stock at cost (458,964 and 475,112 shares in 1999 and 1998, respectively) (1,674) (1,736) Restricted stock (Note 8) (71) 0 Accumulated other comprehensive (loss) income (1,877) 1,113 - -------------------------------------------------------------------------------------------- Total stockholders' equity 36,513 36,631 - -------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $509,624 $470,134 ============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, - -------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 12,198 $ 10,924 $ 9,980 Interest and dividends on investment securities: Taxable interest income 18,241 18,315 19,173 Non-taxable interest income 857 700 967 Dividends 344 197 38 Interest on Federal funds sold and securities purchased under agreement to resell 452 550 548 - -------------------------------------------------------------------------------------------------------------- Total interest income 32,092 30,686 30,706 - -------------------------------------------------------------------------------------------------------------- Interest expense: Interest on certificates of deposit $100,000 and over 2,703 4,301 5,836 Interest on other deposits 7,310 7,850 8,034 Interest on borrowings 2,788 1,422 617 - -------------------------------------------------------------------------------------------------------------- Total interest expense 12,801 13,573 14,487 - -------------------------------------------------------------------------------------------------------------- Net interest income 19,291 17,113 16,219 Provision for loan losses (Note 5) 108 120 0 - -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 19,183 16,993 16,219 - -------------------------------------------------------------------------------------------------------------- Other income: Service charges, commissions and fees 863 748 638 Other income 228 223 139 (Loss) gain on securities sold (Note 4) (2) 0 334 - -------------------------------------------------------------------------------------------------------------- Total other income 1,089 971 1,111 - -------------------------------------------------------------------------------------------------------------- Other expense: Salaries and employee benefits (Note 8) 6,772 6,005 5,487 Occupancy, net (Note 14) 1,251 1,063 1,015 Premises and equipment (Notes 6 and 14) 1,348 1,297 1,341 Stationery and printing 471 438 254 Marketing and advertising 504 446 337 Other 2,944 2,402 2,162 - -------------------------------------------------------------------------------------------------------------- Total other expense: 13,290 11,651 10,596 - -------------------------------------------------------------------------------------------------------------- Income before income tax expense 6,982 6,313 6,734 Income tax expense (Note 9) 2,353 2,141 2,223 - -------------------------------------------------------------------------------------------------------------- Net income $ 4,629 $ 4,172 $ 4,511 - -------------------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 1.23 $ 1.12 $ 1.22 Diluted $ 1.22 $ 1.10 $ 1.21 Weighted average common shares outstanding: Basic 3,775,846 3,741,478 3,710,804 Diluted 3,799,680 3,777,390 3,738,236 ==============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 LOGO Center Bancorp, Inc. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997 - ------------------------------------------------------------------------------------------ Common Stock Common Additional (in thousands, Shares Stock Paid In Retained except share data) Outstanding Amount Capital Earnings - ------------------------------------------------------------------------------------------- Balance December 31, 1996 3,355,936 $ 4,468 $3,510 $ 23,738 - ------------------------------------------------------------------------------------------ YEAR 1997 Cash dividend (1,863) Common stock dividend 167,863 2,557 (2,557) Issuance of common stock 17,566 271 Exercise of stock options 806 3 Comprehensive income: Net income 4,511 Unrealized holding gains on securities arising during the period (net of tax of $300) Less reclassification adjustment for gains included in net income (net of tax of $114) Net unrealized holding gain on securities arising during the period (net of tax $186) Total comprehensive income - ------------------------------------------------------------------------------------------ Balance December 31, 1997 3,542,171 $ 7,296 $3,513 $ 23,829 - ------------------------------------------------------------------------------------------ YEAR 1998 Cash dividend (2,023) Issuance of common stock 18,264 320 Exercise of stock options 17,714 147 Comprehensive income: Net income 4,172 Unrealized holding gain on secu- rities arising during the period (net of taxes of $347) Total comprehensive income - ------------------------------------------------------------------------------------------ Balance December 31, 1998 3,578,149 $ 7,616 $3,660 $ 25,978 - ------------------------------------------------------------------------------------------ YEAR 1999 Cash Dividend (2,213) Common stock dividend 179,260 2,826 (2,826) Issuance of common stock 20,920 318 Exercise of stock options 11,600 93 Restricted stock award 4,548 54 Comprehensive income: Net income 4,629 Unrealized holding losses on securities arising during the period (net of taxes of ($1,540)) Less reclassification adjustment for losses included in net income (net of tax benefit $1) Net unrealized holding loss on securities arising during the period (net of tax of ($1,541)) Total comprehensive income - ------------------------------------------------------------------------------------------ Balance December 31,1999 3,794,477 $10,760 $3,807 $ 25,568 ==========================================================================================
[RESTUBBED TABLE]
Years Ended December 31, 1999, 1998 and 1997 - ----------------------------------------------------------------------------------------------- Accumulated Other Stock- (in thousands, Treasury Restricted Comprehensive holders' except share data) Stock Stock Income Equity - ----------------------------------------------------------------------------------------------- Balance December 31, 1996 $ (1,814) $ 0 $ 311 $ 30,213 - --------------------------------------------------------------------------------------------- YEAR 1997 Cash dividend (1,863) Common stock dividend Issuance of common stock 271 Exercise of stock options 6 9 Comprehensive income: Net income 4,511 Unrealized holding gains on securities arising during the period (net of tax of $300) 501 Less reclassification adjustment for gains included in net income (net of tax of $114) 220 -------- Net unrealized holding gain on securities arising during the period (net of tax $186) 281 281 -------- Total comprehensive income 4,792 - --------------------------------------------------------------------------------------------- Balance December 31, 1997 $ (1,808) $ 0 $ 592 $ 33,422 - --------------------------------------------------------------------------------------------- YEAR 1998 Cash dividend (2,023) Issuance of common stock 320 Exercise of stock options 72 219 Comprehensive income: Net income 4,172 Unrealized holding gain on secu- rities arising during the period (net of taxes of $347) 521 521 -------- -------- Total comprehensive income 4,693 - --------------------------------------------------------------------------------------------- Balance December 31, 1998 $ (1,736) $ 0 $ 1,113 $ 36,631 - --------------------------------------------------------------------------------------------- YEAR 1999 Cash Dividend (2,213) Common stock dividend Issuance of common stock 318 Exercise of stock options 45 138 Restricted stock award 17 (71) Comprehensive income: Net income 4,629 Unrealized holding losses on securities arising during the period (net of taxes of ($1,540)) (2,991) Less reclassification adjustment for losses included in net income (net of tax benefit $1) 1 -------- Net unrealized holding loss on securities arising during the period (net of tax of ($1,541)) (2,990) (2,990) -------- Total comprehensive income 1,639 - --------------------------------------------------------------------------------------------- Balance December 31,1999 $ (1,674) $ (71) $ (1,877) $ 36,513 =============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------ (dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,629 $ 4,172 $ 4,511 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,465 1,413 1,484 Provision for loan losses 108 120 0 Provision for deferred taxes (267) 108 433 (Loss) gain on sale of investment securities available-for-sale (2) 0 334 (Increase) decrease in accrued interest receivable (607) 230 21 (Increase) decrease in other assets (1,020) (236) 197 (Decrease) increase in other liabilities (492) 973 629 Amortization of premium and accretion of discount on investment securities, net 7 179 217 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 3,821 6,959 7,826 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities available-for-sale 25,871 63,914 10,321 Proceeds from maturities of investment securities held to maturity 54,178 80,494 69,813 Proceeds from sales of investment securities available-for-sale 2,997 0 26,153 Purchase of securities available-for-sale (35,743) (63,817) (84,256) Purchase of securities held to maturity (66,272) (69,917) (40,468) Net increase in loans (19,001) (17,738) (14,618) Property and equipment expenditures, net (1,494) (1,386) (186) - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (39,464) (8,450) (33,241) - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 12,088 (58,843) 9,356 Dividends paid (2,213) (2,023) (1,863) Proceeds from issuance of common stock 318 320 271 Net increase in short-term borrowings 28,150 51,902 700 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 38,343 (8,644) 8,464 - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 2,700 (10,135) (16,951) - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of year 15,975 26,110 43,061 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 18,675 $ 15,975 $ 26,110 - ------------------------------------------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Interest paid on deposits and short term borrowings $ 12,293 $ 13,465 $ 14,433 Income taxes $ 2,505 $ 2,005 $ 2,002 ==================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Center Bancorp, Inc. (the Corporation) are prepared on the accrual basis and include the accounts of the Corporation and its wholly-owned subsidiary, Union Center National Bank and its subsidiaries (the Bank). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. BUSINESS The Bank provides a full range of banking services to individual and corporate customers through branch locations in Union and Morris Counties, New Jersey. The Bank is subject to competition from other financial institutions and is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for that period. Actual results could differ significantly from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from banks, Federal funds sold, and securities purchased under agreements to resell. Generally, Federal funds and securities purchased under agreements to resell are sold for one-day periods. INVESTMENT SECURITIES The Corporation classifies investments into the following categories: (1) held to maturity securities, for which the Corporation has both the positive intent and ability to hold until maturity, are reported at amortized cost; (2) trading securities, which are purchased and held principally for the purpose of selling in the near term, are reported at fair value with unrealized gains and losses included in earnings; and (3) available-for-sale securities, which do not meet the criteria of the other two categories, are reported at fair value with unrealized gains and losses, net of applicable income taxes, reported as a component of accumulated other comprehensive income which is included in stockholders' equity and excluded from earnings. Investment securities held to maturity are adjusted for amortization of premiums and accretion of discounts which are recognized on a level yield method, as adjustments to interest income. Investment securities gains or losses are determined using the specific identification method. INCOME TAXES The Corporation recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this 36 method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be settled. LOANS Loans are stated at their principal amounts less net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal; in those cases the recognition of income is discontinued. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loan's yield. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Impaired loans include, at a minimum, non-accrual loans and loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000. All loans below the established dollar threshold are considered homogenous and are considered in the Bank's credit evaluation process. At December 31, 1999, total impaired loans were approximately $519,000, the Corporation did not have any impaired loans at December 31, 1998 or 1997. Although classified as substandard, the impaired loans were current with respect to principal and interest payments. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level determined adequate to provide for potential loan losses. The allowance is increased by provisions charged to operations and reduced by loan charge-offs, net of recoveries. The allowance is based on management's evaluation of the loan portfolio considering economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit situations. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties. The ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness of the borrowers. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in New Jersey. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. BANK PREMISES AND EQUIPMENT Land is carried at cost and bank premises and equipment at cost less accumulated depreciation based on estimated useful lives of assets, computed principally on the straight-line basis. Expenditures for maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Gains and losses on sales or other dispositions are recorded as other income or other expenses. 37 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PENSION PLAN The Corporation has a non-contributory pension plan covering all eligible employees. The Corporation's policy is to fund at least the minimum contribution required by the Employee Retirement Income Security Act of 1974. The costs associated with the plan are accrued based on actuarial assumptions and included in non-interest expense. STOCK BASED COMPENSATION The Corporation accounts for stock options using the intrinsic value method under APB opinion No. 25 and provides the required disclosures of fair values under SFAS No. 123, "Accounting for Stock-Based Compensation." EARNINGS PER SHARE All share and per share amounts have been restated to reflect the 5% stock dividend distributed on June 1, 1999, the three-for-two stock split distributed in May of 1998 and the 5% stock dividend distributed in May 1997. Basic Earnings Per Share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g. stock options). The Corporation's weighted average common shares outstanding for diluted EPS include the effect of stock options outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS. Earnings per common share have been computed based on the following:
Years Ended December 31, - -------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------- Net income $4,629 $4,172 $4,511 - -------------------------------------------------------------------------------------- Average number of common shares outstanding 3,776 3,741 3,711 Effect of dilutive options 22 36 27 Effect of restricted stock awards 2 0 0 - -------------------------------------------------------------------------------------- Average number of common shares outstanding used to calculate diluted earnings per common share 3,800 3,777 3,738 ======================================================================================
TREASURY STOCK Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders' equity. COMPREHENSIVE INCOME Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Bank's other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale. Disclosure of comprehensive income for the years ended 1999, 1998 and 1997 is presented in the Consolidated Statements of Changes in Stockholders' Equity. 38 RECLASSIFICATIONS Certain reclassifications have been made in the consolidated financial statements for 1998 and 1997 to conform to the classifications presented in 1999. NOTE 2: ACQUISITION On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA (Lehigh), a New Jersey chartered savings and loan association in a transaction accounted for under the purchase method of accounting. At June 28, 1996, Lehigh had assets of $70.9 million (primarily cash and cash equivalents of $53.0 million and loans of $15.0 million) and deposits and stockholders' equity of $68.2 million and $2.7 million, respectively. The Corporation paid $5.5 million in cash for Lehigh, resulting in goodwill of $3.8 million. The goodwill is being amortized on a straight-line basis over 15 years. The consolidated financial statements of the Corporation include assets, liabilities and results of operations of Lehigh since the acquisition date. NOTE 3: CASH AND DUE FROM BANKS The subsidiary bank, Union Center National Bank, maintained cash balances reserved to meet regulatory requirements of the Federal Reserve Board of approximately $189,000 and $238,000 at December 31, 1999 and 1998, respectively. NOTE 4: INVESTMENT SECURITIES The following tables present information related to the Corporation's portfolio of securities held to maturity and available-for-sale at December 31, 1999 and 1998.
December 31, 1999 - ---------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (dollars in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- SECURITIES HELD TO MATURITY: U.S. government and federal agency obligations $126,990 $108 $5,863 $121,235 Obligations of U.S. States and political subdivisions 36,939 53 879 36,113 Other securities 19,521 13 340 19,194 - --------------------------------------------------------------------------------------------------------------- $183,450 $174 $7,082 $176,542 ===============================================================================================================
December 31, 1999 - ---------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (dollars in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE-FOR-SALE: U.S. government and federal agency obligations $ 88,300 $100 $2,665 $ 85,735 Obligations of U.S. states and political subdivisions 13,674 4 374 13,304 Other securities 14,879 1 191 14,689 Equity securities 6,762 0 0 6,762 - --------------------------------------------------------------------------------------------------------------- $123,615 $105 $3,230 $120,490 ===============================================================================================================
39 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4: INVESTMENT SECURITIES (continued)
December 31, 1998 - ---------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (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 ===============================================================================================================
December 31, 1998 - ---------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (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 Equity securities 4,006 0 0 4,006 - --------------------------------------------------------------------------------------------------------------- $114,099 $1,947 $94 $115,952 ===============================================================================================================
The following table presents information for investments in securities held to maturity and debt securities available-for-sale at December 31, 1999, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call privileges of the issuer.
Held to Maturity Available-for-Sale - ----------------------------------------------------------------------------------------------- Estimated Estimated Amortized Fair Amortized Fair (dollars in thousands) Cost Value Cost Value - ----------------------------------------------------------------------------------------------- Due in one year or less $ 69,655 $ 66,013 $ 42,723 $ 41,043 Due after one year through five years 75,346 73,632 65,628 64,445 Due after five years through ten years 21,169 20,251 4,218 3,942 Due after ten years 17,280 16,646 11,046 11,060 - ---------------------------------------------------------------------------------------------- $183,450 $176,542 $123,615 $120,490 ==============================================================================================
During 1999 securities sold from the Corporation's available-for-sale portfolio amounted to approximately $3.0 million. The gross realized losses on securities sold amounted to $2,400 in 1999. During 1998 the Corporation did not sell any securities from its available-for-sale portfolio. Securities sold from the Corporation's available-for-sale portfolio during 1997 amounted to $26.2 million. In 1997, the Corporation recognized gross gains on sale of securities of $334,000. These securities were sold in the ordinary course of business. Investment securities having a carrying value of approximately $63.9 million and $83.1 million at December 31, 1999 and 1998, respectively, were pledged to secure public deposits, short-term borrowings, FHLB advances and for other purposes required or permitted by law. 40 NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES The following table sets forth the composition of the Corporation's loan portfolio at December 31, 1999 and 1998, respectively. (dollars in thousands) 1999 1998 - ------------------------------------------------------------- Real estate--residential mortgage $ 99,800 $ 91,189 Real estate--commercial 24,484 21,338 Commercial and industrial 37,377 30,844 Installment 7,100 5,642 All other 569 1,418 Less unearned income (241) (332) - ------------------------------------------------------------- Loans, net of unearned income $169,089 $150,099 ============================================================= At December 31, 1999 and 1998 loans to officers and directors aggregated approximately $3,506,000 and $3,485,000 respectively. During the year ended December 31, 1999, the Corporation made new loans to officers and directors in the amount of $2,369,000; payments by such persons during 1999 aggregated $2,348,000. Management is of the opinion that the above loans were made on the same terms and conditions as those prevailing for comparable transactions with non-related borrowers. A summary of the activity in the allowance for loan losses is as follows:
(dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ Balance at the beginning of year $1,326 $1,269 $1,293 Provision for loan losses 108 120 0 Loans charged-off (23) (70) (31) Recoveries on loans previously charged-off 12 7 7 - ------------------------------------------------------------------------------ Balance at the end of year $1,423 $1,326 $1,269 ==============================================================================
Total non-performing assets, are comprised of the outstanding balances of accruing loans which are 90 days or more past due as to principal or interest payments, non-accrual loans and other real estate owned. Total non-performing assets at December 31, 1999 and 1998 were as follows: (dollars in thousands) 1999 1998 - -------------------------------------------------------------------------- Loans past due in excess of 90 days and still accruing $ 0 $ 24 Non-accrual loans 292 41 Other real estate owned 73 73 - ------------------------------------------------------------------------- Total non-performing assets $365 $138 ========================================================================= The amount of interest income that would have been recorded on non-accrual loans in 1999, 1998 and 1997 had payments remained in accordance with the original contractual terms, approximated $15,367, $3,000 and $2,800 respectively, while no interest income was received on these types of assets in 1999, 1998 and 1997, resulting in a loss of interest income of $15,367, $3,000 and $2,800, respectively. At December 31, 1999, total impaired loans were approximately $519,000, the Corporation did not have any impaired loans at December 31, 1998 or 1997. Although classified as substandard, the impaired loans were current with respect to principal and interest payments. The Corporation's total average impaired loans during 1999 were $493,000 and $0 during 1998. Interest income on impaired loans totaled $41,430 and $0 in 1999 and 1998, respectively. 41 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued) At December 31, 1999, there were no commitments to lend additional funds to borrowers whose loans were non-accrual or contractually past due in excess of 90 days and still accruing interest. The Bank's policy is to generally grant commercial, mortgage, and installment loans to New Jersey residents and businesses within its trading area. The borrowers' abilities to repay their obligations are dependent upon various factors including the borrowers' income and net worth, cash flows generated by the borrowers' underlying collateral, value of the underlying collateral, and priority of the Bank's lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank's control. The Bank is therefore subject to risk of loss. The Bank believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans. NOTE 6: BANK PREMISES AND EQUIPMENT A summary of the Corporation's premises and equipment at December 31, 1999 and 1998 follows: (dollars in thousands) 1999 1998 - ----------------------------------------------------------------------- Land $ 1,649 $ 1,649 Buildings 6,017 5,653 Furniture, fixtures and equipment 8,549 7,778 Leasehold improvements 1,410 1,105 - ----------------------------------------------------------------------- Subtotal 17,625 16,185 Less accumulated depreciation and amortization 7,847 6,759 - ----------------------------------------------------------------------- Total $ 9,778 $ 9,426 ======================================================================= Depreciation expense for the three years ended December 31, 1999 amounted to $1,142,743 in 1999, $1,090,733 in 1998 and $1,159,847 in 1997, respectively. NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS At December 31, 1999 advances from the Federal Home Loan Bank of New York(FHLB) amounted to $50,000,000, compared to $40,000,000 at December 31, 1998. There were no FHLB advances outstanding at December 31, 1997. The FHLB advances have a weighted average interest rate of 5.35 percent and 4.80 percent at December 31, 1999 and December 31, 1998, respectively. These advances are secured by pledges of FHLB stock, 1-4 family residential mortgages and U.S. Government and Federal Agency obligations. The advances are subject to quarterly call provisions at the discretion of FHLB while others have fixed maturity dates and at December 31, 1999, and 1998 are scheduled for repayment as follows: (dollars in thousands) 1999 1998 - ------------------------------------------------ 2000 $50,000 $ 0 2003 0 10,000 2008 0 30,000 - ------------------------------------------------ Total $50,000 $40,000 ================================================ 42 Other borrowings consisting of securities sold under agreements to repurchase had average balances of $19,484,000, $8,455,000, and $10,858,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The maximum amount outstanding at any month end during 1999, 1998 and 1997 respectively was $30,752,000, $15,063,000 and $27,320,000 NOTE 8: PENSION AND BENEFITS The Corporation maintains a non-contributory pension plan for substantially all of its employees. The benefits are based on years of service and the employee's compensation over the prior five-year period. The plan's assets consist primarily of an insurance annuity. In addition, the Corporation has a non-qualified retirement plan which is designed to supplement the pension plan for key employees. In 1998 the Corporation adopted a Director's Retirement Plan, which is designed to provide retirement benefits for members of the Board of Directors. The expense associated with the plan amounted to $116,359 for 1999 and 1998 and is included in non-interest expense. The following table sets forth change in projected benefit obligation, change in fair value of plan assets, funded status, and amounts recognized in the consolidated statements of condition for the Corporation's pension plans at December 31, 1999 and 1998.
Change in Benefit Obligation (dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- Projected benefit obligation at beginning of year $ 4,578 $ 4,499 Service cost 335 332 Interest cost 334 328 Actuarial loss (gain) 414 (367) Benefits paid (235) (214) - ------------------------------------------------------------------------------- Projected benefit obligation at end year $ 5,426 $ 4,578 =============================================================================== Change in Plan Assets - ------------------------------------------------------------------------------- Fair value of plan assets at beginning year $ 4,369 $ 3,981 Actual return on plan assets 281 415 Employer contributions 71 187 Benefits paid (235) (214) - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 4,486 $ 4,369 =============================================================================== Funded status $ (940) $ (209) Unrecognized net asset (10) (13) Unrecognized prior service cost 125 140 Unrecognized net actuarial gain (540) (1,034) - ------------------------------------------------------------------------------- Accrued benefit cost $ (1,365) $ (1,116) ===============================================================================
The net periodic pension cost for 1999, 1998 and 1997 includes the following components. (dollars in thousands) 1999 1998 1997 - --------------------------------------------------------------- Service cost $ 335 $ 332 $ 246 Interest cost 334 328 296 Actual return on plan assets (281) (415) (446) Net amortization and deferral (69) 115 168 - --------------------------------------------------------------- Net periodic pension expense $ 319 $ 360 $ 264 =============================================================== 43 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8: PENSION AND BENEFITS (continued) The following table presents the assumptions used to calculate the projected benefit obligation in each of the last three years.
1999 1998 1997 - ---------------------------------------------------------------------------------------- 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 1999, 1998, and 1997, employer contributions amounted to $74,099, $61,691 and $60,777, respectively. STOCK OPTION PLANS At the 1999 Annual Meeting of Shareholders, the shareholders approved the adoption of the Center Bancorp, Inc. 1999 Employee Stock Incentive Plan. Under this Plan an aggregate of 179,000 shares are authorized for issuance. Such shares may be treasury shares or newly issued shares or a combination thereof. This Plan permits Center Bancorp, Inc. common stock to be issued to key employees and directors of the Corporation and its subsidiary. The options granted under this Plan are intended to be either incentive stock options or non-qualified options. This Plan also authorizes the grant of restricted stock awards. Options have been granted to purchase common stock principally at the fair market value of the stock at the date of grant. Options are exercisable starting one year after the date of grant and generally expire ten years from the date of grant. Upon the exercise of options, proceeds received in excess of the average treasury cost of the shares are credited to additional paid in capital. 44 Changes in options outstanding during the past three years were as follows: Exercise Price Range Stock Option Plan Shares Per Share - --------------------------------------------------------------------- Outstanding, December 31, 1996, (133,880 shares exercisable) 164,093 $10.95 to $11.77 Granted during 1997 15,629 $ 13.12 Exercised during 1997 (846) $ 10.95 Expired or canceled during 1997 0 - --------------------------------------------------------------------- Outstanding, December 31, 1997, (153,411 shares exercisable) 178,876 $10.95 to $13.12 Granted during 1998 0 Exercised during 1998 (18,600) $10.95 to $13.12 Expired or canceled during 1998 0 - --------------------------------------------------------------------- Outstanding, December 31, 1998, (150,125 shares exercisable) 160,276 $10.95 to $13.12 Granted during 1999 42,970 $ 15.50 Exercised during 1999 (11,700) $10.98 to $11.80 Expired or canceled during 1999 0 - --------------------------------------------------------------------- Outstanding, December 31, 1999, (143,370 shares exercisable) 191,546 $10.95 to $15.50 ===================================================================== Fair Value of Stock Options Grants The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model The following weighted-average assumptions were used for the grants of options in 1999: o Dividend yield of 4.00% o Expected volatility of 22.0% o Risk-free interest rates based upon equivalent-term Treasury Rates o Expected options lives were contractual lives at the date of grant The following weighted-average assumptions were used for the grants of options in 1997: o Dividend yield of 3.70% o Expected volatility of 44.3% o Risk-free interest rates based upon equivalent-term Treasury Rates o Expected options lives were the contractual lives at the date of grant 45 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 8: PENSION AND BENEFITS (continued) The following table summarizes the fair value of the stock options granted during the last three years ended December 31, 1999. There were no grants of stock options in 1998.
1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- 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 42,970 $ 2.97 0 $0 0 $ 0 Director's plan 0 $ 0 0 $0 15,629 $ 5.54 - -------------------------------------------------------------------------------------------------------------------- Total 42,970 $ 2.97 0 $0 15,629 $ 5.54 ====================================================================================================================
Under APB Opinion 25, compensation cost for the stock options is not recognized because the exercise price of the stock options equals the market price of the underlying stock on the date of the grant. Had compensation expense been recorded for stock options granted as determined under SFAS 123, net income would have been reduced by approximately $30,450 in 1999, $19,000 in 1998 and 1997, which would have changed the Corporation's basic earnings per share, by $.01 in 1999, 1998 and 1997 and would have reduced the diluted earnings per share by $.01 in 1999 and 1997. RESTRICTED STOCK Restricted Stock may be awarded to key employees providing for the immediate award of the Corporation's common stock subject to certain vesting and other restrictions. During 1999, 4,548 shares were awarded and issued from treasury shares to a trust. The Fair Value of the shares at the date of the award will be amortized into salary expense over the vesting period. There were no awards of restricted stock in 1998 or 1997. The amount of compensation costs related to restricted stock awards included in salary expense amounted to $7,000 in 1999. As of December 31, 1999, none of the restricted stock awards were vested. NOTE 9: INCOME TAXES The current and deferred amounts of income tax expense for the years ended December 31, 1999, 1998 and 1997, respectively, are as follows: (dollars in thousands) (dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------- CURRENT: Federal $2,526 $1,871 $1,569 State 94 162 221 - ------------------------------------------------------------- 2,620 2,033 1,790 - ------------------------------------------------------------- DEFERRED: Federal (263) 108 433 State (4) 0 0 - ------------------------------------------------------------- Income tax expense $2,353 $2,141 $2,223 ============================================================= 46 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) 1999 1998 1997 - ----------------------------------------------------------------------------------------- Income before income tax expense $6,982 $ 6,313 $ 6,734 Federal statutory rate 34% 34% 34% - ----------------------------------------------------------------------------------------- Compute "expected" Federal income tax expense 2,374 2,146 2,289 State tax net of Federal tax benefit 59 107 144 Decrease in valuation allowance (4) 0 0 Tax-exempt interest and dividends (291) (223) (298) Other, net 215 111 88 - ----------------------------------------------------------------------------------------- Income tax expense $2,353 $ 2,141 $ 2,223 =========================================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 1999 and 1998 are presented below.
(dollars in thousands) 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 289 $ 234 Pension expense 617 392 Organization cost 58 0 Unrealized losses on securities available-for-sale 1,248 0 Operating loss carry forward 0 35 - ------------------------------------------------------------------------------- Total gross deferred tax asset 2,212 661 Valuation allowance (54) (58) - ------------------------------------------------------------------------------- Net deferred tax asset $2,158 $ 603 - ------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 280 $ 283 Market discount accretion 97 69 Deferred fee expense-mortgages 206 190 Unrealized gains on securities available-for-sale 0 740 Other 19 20 - ------------------------------------------------------------------------------- Total gross deferred tax liabilities 602 1,302 - ------------------------------------------------------------------------------- Net deferred tax asset (liability) $1,556 $ (699) ===============================================================================
Based on the Corporation's historical and current pre-tax earnings and the availability of net operating loss carrybacks on a federal basis, management believes it is more likely than not that the Corporation will realize the benefit of the net deductible temporary differences existing at December 31, 1999 and 1998, respectively. The valuation allowance is due to the state tax effect of the net deductible temporary difference calculated on a separate company basis. The valuation allowance for deferred tax assets as of December 31, 1999 was $54,000 compared to $58,000 in 1998. NOTE 10: REGULATORY CAPITAL REQUIREMENTS FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1999, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. 47 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10: REGULATORY CAPITAL REQUIREMENTS (continued) Such actions could have a direct material effect on the institution's financial statements. The regulations establish a framework for the classification of financial institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the FDIC about capital components, risk weightings and other factors. As of December 31, 1999, management believes that the Bank meets all capital adequacy requirements to which it is subject and is a well-capitalized institution under the prompt corrective action regulations. The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1999 and 1998, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized institution:
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, 1999 Leverage (Tier 1) capital $35,496 6.90% $20,574 4.00% $25,717 5.00% - -------------------------------------------------------------------------------------------------------- Risk-based capital: Tier 1 35,496 14.61% 9,721 4.00% 14,582 6.00% Total 36,919 15.19% 19,442 8.00% 24,303 10.00% - -------------------------------------------------------------------------------------------------------- December 31, 1998 - -------------------------------------------------------------------------------------------------------- Leverage (Tier 1) capital $32,092 6.85% $18,760 4.00% $23,298 5.00% - -------------------------------------------------------------------------------------------------------- Risk-based capital: - -------------------------------------------------------------------------------------------------------- Tier 1 32,092 14.66% 8,633 4.00% 12,949 6.00% Total 33,418 15.48% 17,625 8.00% 21,581 10.00% ========================================================================================================
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires that the Bank disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments: The carrying amounts for cash and cash-equivalents approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of investment securities is estimated based on bid quotations received from securities dealers. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate-mortgage, and installment loans. The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows 48 through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank's historical experience with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. The fair value of deposits with no stated maturity, such as Non-interest-bearing demand deposits, savings and interest-bearing checking accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1999 and 1998. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of commitments to extend credit and standby letters of credit are estimated at the fee charged by the Bank for similar transactions. This amount is deemed to be immaterial. Short-term borrowings that mature within six months have fair values equal to their carrying value. The fair value of FHLB advances is based on the discounted value of estimated cash flows. The discount rate is estimated using the rates currently offered for similar advances. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities,goodwill, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered. 49 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) The estimated fair value of the Corporation's financial instruments are as follows:
December 31, - -------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (dollars in thousands) Amount Value Amount Value - -------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ 18,675 $ 18,675 $ 15,975 $ 15,975 Investments Available-for-Sale 120,490 120,490 115,952 115,952 Investments Held to Maturity 183,450 176,542 172,014 174,184 Net loans 167,666 165,371 148,773 150,621 FINANCIAL LIABILITIES: Non-interest bearing deposits $ 94,829 $ 94,829 $ 82,072 $ 82,072 Interest-bearing deposits 294,426 294,403 295,095 296,170 Federal funds purchased, securities sold under agreement to repurchase and FHLB advances $ 80,752 $ 80,731 $ 52,602 $ 50,402 ==================================================================================================
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS Center Bancorp, Inc. operates its wholly-owned subsidiary, Union Center National Bank. The earnings of this subsidiary are recognized by the Corporation using the equity method of accounting. Accordingly, earnings are recorded as increases in the Corporation's investment in the subsidiary and dividends paid reduce the investment in the subsidiary. The ability of the Corporation to pay dividends will largely depend upon the dividends paid to it by the Bank. Dividends payable by the Bank to the Corporation are restricted under supervisory regulations (see Note 13). Condensed financial statements of the Parent Corporation only are as follows: CONDENSED STATEMENTS OF CONDITION At December 31, - ----------------------------------------------------------------------- (dollars in thousands) 1999 1998 - ----------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 144 $ 353 Investment in subsidiary 36,360 36,271 Other assets 578 548 - ----------------------------------------------------------------------- Total assets $37,082 $37,172 ======================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 569 $ 541 Stockholders' equity 36,513 36,631 - ----------------------------------------------------------------------- Total liabilities and stockholders' equity $37,082 $37,172 ======================================================================= 50 CONDENSED STATEMENTS OF INCOME
For years ended December 31, - ------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------- Income Dividend income from subsidiary $1,663 $1,720 $1,677 Management fees 59 50 43 - ------------------------------------------------------------------------------------- Total Income 1,722 1,770 1,720 Expenses 173 159 160 - ------------------------------------------------------------------------------------- Net income before equity in earnings of subsidiary 1,549 1,611 1,560 Undistributed equity in earnings of subsidiary 3,080 2,561 2,951 - ------------------------------------------------------------------------------------- Net Income $4,629 $4,172 $4,511 =====================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
For years ended December 31, - -------------------------------------------------------------------------------------------- (dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------- Operating Activities: Net income $ 4,629 $ 4,172 $ 4,511 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed equity in earnings of subsidiary (3,080) (2,561) (2,951) Other, net (1) 31 (35) - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,548 1,642 1,525 - -------------------------------------------------------------------------------------------- Investing Activities: Net cash used in investing activities 0 0 0 - -------------------------------------------------------------------------------------------- Financing Activities: Cash Dividends (2,213) (2,023) (1,863) Proceeds from exercise of stock options 138 219 9 Proceeds from issuance of common stock 318 320 271 - -------------------------------------------------------------------------------------------- Net cash used in financing activities (1,757) (1,484) (1,583) - -------------------------------------------------------------------------------------------- Increase (decrease) in cash (209) 158 (58) Cash and cash equivalents at beginning of year 353 195 253 - -------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of year $ 144 $ 353 $ 195 ============================================================================================
NOTE 13: DIVIDENDS AND OTHER RESTRICTIONS Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the subsidiary bank for the future payment of dividends to the Corporation. A dividend may not be paid if it would impair the Bank's capital. Furthermore, prior approval by the Comptroller of the Currency is required if the total of dividends declared in a calendar year exceeds the total of the Bank's net profits for that year combined with its retained profits for the two preceding years. At December 31, 1999, $10,311,600 was available for the payment of dividends. 51 LOGO Center Bancorp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 14: COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Corporation has outstanding commitments and contingent liabilities such as commitments to extend credit, including loan commitments of $36,991,000, ($36,475,000 subject to variable rate indices and $516,000 fixed rate commitments) as of December 31, 1999. Standby letters of credit, which are not reflected in the accompanying consolidated financial statements, totaled $7,242,000 and $6,731,000 as of December 31, 1999 and 1998, respectively. Commitments to extend credit and standby letters of credit generally do not exceed one year. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements. The commitment or contract amount of these financial instruments is an indicator of the Corporation's level of involvement in each type of instrument as well as the exposure to credit loss in the event of non-performance by the other party to the financial instrument. The Corporation controls credit risk of these financial instruments through credit approvals, limits and monitoring procedures. To minimize potential credit risk the Corporation generally requires collateral and other credit related terms and conditions from the customer. In the opinion of management the financial condition of the Corporation will not be materially affected by the final outcome of these commitments and contingent liabilities. A substantial portion of the Bank's loans are one to four family residential first mortgage loans secured by real estate located in New Jersey. Accordingly, the collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in the real estate market. Non-interest expenses include rentals for premises and equipment of $325,765 in 1999, $264,825 in 1998, and $203,168 in 1997. At December 31, 1999, Center Bancorp, Inc. and its subsidiary were obligated under a number of non-cancelable leases for premises and equipment, many of which provide for increased rentals based upon increases in real estate taxes and the cost of living index. These leases, most of which have renewal provisions, are principally operating leases. Minimum rentals under the terms of these leases for the years 2000 through 2004 are $353,664, $363,456, $379,286, $399,188, and $420,208 respectively. Minimum rentals due 2005 and after are $636,987. On November 18, 1999, the Corporation executed a Purchase Agreement with the Town of Morristown, New Jersey in the amount of $751,000 to purchase at public auction property located at 214 South Street. At that date, the Corporation deposited the sum of $50,000 with the Town Officer conducting the auction. The Corporation is subject to claims and lawsuits which arise in the ordinary course of business. Based upon the information currently available and advice received from legal counsel representing the Corporation in connection with such claims, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse impact on the consolidated financial position or results of operations, or liquidity of the Corporation. 52 NOTE 15: QUARTERLY FINANCIAL INFORMATION CENTER BANCORP, INC., (unaudited)
1999 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter - -------------------------------------------------------------------------------------------------------------- Total interest income $ 8,453 $ 8,171 $ 7,928 $ 7,540 Total interest expense 3,479 3,283 3,090 2,949 Net interest income 4,974 4,888 4,838 4,591 Provision for loan losses 36 36 18 18 Other income 289 286 270 246 Other expense 3,500 3,347 3,312 3,132 Income before income taxes 1,727 1,791 1,778 1,687 Net income 1,166 1,162 1,170 1,131 Earnings per share: Basic $ 0.31 $ 0.31 $ 0.31 $ 0.30 Diluted $ 0.31 $ 0.30 $ 0.31 $ 0.30 Weighted average common shares outstanding: Basic 3,787,679 3,782,645 3,774,570 3,760,772 Diluted 3,810,573 3,810,573 3,798,112 3,787,237 - -------------------------------------------------------------------------------------------------------------
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 $ 0.29 $ 0.26 $ 0.26 $ 0.30 Diluted $ 0.29 $ 0.26 $ 0.25 $ 0.30 Weighted average common shares outstanding: Basic 3,754,983 3,748,815 3,735,908 3,726,115 Diluted 3,787,151 3,777,723 3,773,821 3,770,864 - -------------------------------------------------------------------------------------------------------------
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, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Center Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Short Hills, New Jersey January 28, 2000 54 EX-21 4 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT A3. Exhibits Organizational Chart 21.1 Subsidiaries of the Registrant As of December 31, 1999 UNION CENTER NATIONAL BANK 2455 MORRIS AVENUE UNION, NEW JERSEY 07083 (100% Owned by Center Bancorp, Inc.) EX-23 5 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Center Bancorp, Inc.: We consent to the incorporation by reference in the Registration Statement No. 33-72176 on Form S-8 and Registration Statement No. 33-72178 of Form S-3 of Center Bancorp, Inc. of our report dated January 28 2000, relating to the consolidated statements of condition of Center Bancorp, Inc. as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which report is incorporated by reference in the December 31, 1999 Annual Report on Form 10-K of Center Bancorp, Inc. KPMG LLP Short Hills, New Jersey March 30 , 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 18,675 0 0 0 120,490 183,450 176,542 169,089 (1,423) 509,624 389,255 80,752 3,104 0 0 0 10,760 25,753 509,624 12,198 19,442 452 32,092 10,013 12,801 19,291 108 (2) 13,290 6,982 6,982 0 0 4,629 1.23 1.22 6.93 292 0 0 0 1,326 23 12 1,423 1,365 0 58
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