UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| (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, 2006
2009OR
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition periodTransition Period from to
Commission File Number: 2-81353
000-11486CENTER BANCORP, INC.
(Exact nameName of Registrant as specifiedSpecified in its charter)
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New Jersey | 52-1273725 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number) |
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)Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:None
Common Stock, No Par Value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes¨o or Noýx
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨or Noýx
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. Yesýx or No¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has required to submit and post such files.)Yeso Noo Not applicable
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-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.¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definition of “accelerated filer and large“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934).
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Large | Accelerated | Non-Accelerated | Small Reporting Companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes¨o or Noýx
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter – $178.0— $78.3 million
Shares outstandingOutstanding on February 28, 2007March 1, 2010
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement in connection with the 20072010 Annual Stockholders Meeting to be filed with the Commission pursuant to Regulation 14A will be incorporated by reference in Part III.
CENTER BANCORP, INC.
TABLE OF CONTENTS
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| PART I | ||||||
Item 1. Business | 1 | |||||
Item 1A. Risk Factors | 14 | |||||
| 1B. Unresolved Staff Comments | ||||||
Item 2. Properties | ||||||
| 3. Legal Proceedings | ||||||
| 22 | ||||||
Item 4. Reserved | 23 | |||||
| PART II | ||||||
Selected Financial Data | ||||||
| F-1 | ||||||
| F-2 | ||||||
| F-3 | ||||||
| F-4 | ||||||
| Consolidated Statements of Changes in Stockholders’ Equity | F-5 | |||||
| Consolidated Statements of Cash Flows | F-6 | |||||
| Notes to Consolidated Financial Statements | F-8 | |||||
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 65 | |||||
Item 9A. Controls and Procedures | 65 | |||||
Item 9B. Other Information | 67 | |||||
| PART III | ||||||
Item 10. Directors and Corporate Governance | ||||||
Executive Compensation | ||||||
| 68 | ||||||
Item 15. Exhibits and Financial Statements Schedules | 69 | |||||
Information included in or incorporated by reference in this Annual Report on Form 10-K, other filings with the Securities and Exchange Commission and the Corporation’s press releases or other public statements, contain or may contain forward looking statements. Please refer to a discussion of the Corporation’s forward looking statements and associated risks in “Item 1 — Business — Historical Development of Business” and “Item 1A — Risk Factors” in this Annual Report on Form 10-K.
i
Historical Development of Business
This report, in Item 1, Item 7 and else whereelsewhere, includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Center Bancorp, Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which Center Bancorp, Inc. is engaged; (7) changes and trends in the securities markets may adversely impact Center Bancorp;Bancorp, Inc; (8) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (9) the impact onof reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of Center Bancorp, Inc. are included in Item 1A of this Annual Report on Form 10-K and in Center Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website athttp://www.sec.gov and/or from Center Bancorp.Bancorp, Inc. Center Bancorp, Inc. assumes no obligation to update forward-looking statements at any time.
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 Thecapital stock of Union Center National Bank (the “Bank”), its principal subsidiary. The holding company’s sole activity, at this time, is to act as a holding company for the Bank and itsother subsidiaries. As used herein, the term “Corporation” shall refer to Center Bancorp, Inc. and its direct and indirect subsidiaries and the term “Parent Corporation” shall refer to Center Bancorp, Inc. on an unconsolidated basis. In addition to its principal subsidiary, Center Bancorp, Inc. owns 100 percent of the voting shares of Center Bancorp, Inc. Statutory Trust II, through which it issued trust preferred securities. Center Bancorp, Inc. Statutory Trust II is not a consolidated subsidiary. See Note 1210 of the consolidated financial statements.
The Corporation’s wholly ownedwholly-owned subsidiaries are all included in the consolidated financial statements of Center Bancorp, Inc. These subsidiaries include an advertising subsidiary; an insurance subsidiary offering annuity products, property and casualty, life and health insurance;insurance, and various investment subsidiaries which hold, maintain and manage investment assets for the Corporation. TheIn the past, the Corporation’s subsidiaries have also includeincluded real estate investment trust subsidiaries (the “REIT” subsidiaries) which own real estate related investments and a REIT subsidiary that owns some of the real estate loanstwo title insurance partnerships. The title insurance partnerships were liquidated and related real estate investments. All subsidiaries mentioned above are directly or indirectly wholly-owned by the Corporation, except that the Corporation owns less than 100 percent of the preferred stock of the REIT subsidiaries. Each REIT must have 100 or more shareholders to qualify as a REIT, and therefore, each REIT has issued less than 20 percent of their outstanding non-voting preferred stock to individuals, most of whom are non-senior management Union Center National Bank employees.
During 2001 and 2003, the Corporation formed statutory business trusts, which exist for the exclusive purpose of (i) issuing trust securities representing undivided beneficial interests in the assets of a trust; (ii) investing the gross
The Corporation issued $10.3 million of subordinated debentures in 2001 and $5.2 million in 2003 of subordinated debentures.debentures in 2003. On December 18, 2006, the Corporation redeemed $10.3 million of subordinated debentures and dissolved Center Bancorp, Inc. Statutory Trust I. At December 31, 2006,2009, the $5.2 million still outstanding of these securities still outstanding are included as a component of Tier 1 Capital for regulatory purposes. The Tier 1 leverage capital ratio was 8.647.80 percent at December 31, 2006.
During 2002, the Bank established two investment subsidiaries to hold portions of its securities portfolio and inportfolio. At December 2007, under a plan of liquidation adopted by the Bank, one of the investment companies had been liquidated. During 2008, the Corporation formed a new investment company. In January of 2003, the Corporation established an insurance subsidiary for the sale of insurance and annuity products.
SEC Reports and Corporate Governance
The Parent Corporation makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website atwww.centerbancorp.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are Center Bancorp’sthe Corporation’s corporate code of ethics that applies to all of Center Bancorp’sthe Corporation’s employees, including principal officers and directors, and charters for the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee Charter as well as a copy of Center Bancorp’s Corporate Governance Guidelines.
The Parent Corporation has filed the certifications of the Chief Executive Officer and Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 with respect to Center Bancorp’sthe Parent Corporation’s Annual Report on Form 10-K as exhibits to this Report. Center Bancorp’s CEO submitted the required annual CEO’s Certification regarding the NASDAQ’s corporate governance listing standards, Section 12(a) CEO Certification, to the NASDAQ within the required timeframetime frame after the 20062009 annual shareholders’ meeting.
Additionally, the Parent Corporation will provide without charge, a copy of its Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to Center Bancorp, Inc, Attention: Shareholder Relations, 2455 Morris Avenue, Union, New Jersey, 07083.
Narrative Description of the 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, the Bank’s 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 Machine (“ATM”) accessibility using Star Systems, Inc. service, secured and unsecured loans, mortgage loans, home equity lines of credit, safe deposit boxes, Christmas club accounts, vacation club accounts, money orders and traveler’stravelers’ checks.
The Bank, through its subsidiary, Center Financial Group LLC, provides financial services, including brokerage services, insurance and annuities, mutual funds and financial planning. In the fourth quarter of 2007, the Corporation formed a title insurance partnership, Center Title LLC, with Progressive Title Company in Parsippany, New Jersey to provide title services in connection with the closing of real estate transactions. In January 2008, the Corporation formed a title insurance partnership, Union Title LLC, with Elite Title Abstract of West Caldwell, New Jersey to provide title services in connection with the closing of real estate loan transactions. Our partnerships with both title companies were liquidated during December, 2009.
The Bank offers various money market services. It deals in U.S. Treasury and U.S. Governmental agency securities, certificates of deposits,deposit, commercial paper and repurchase agreements.
The Bank entered into a limited liability company operating agreement with Morris Property Company, LLC, a New Jersey limited liability company, during the fourth quarter of 2008. The purpose of Morris Property Company, LLC is to hold foreclosed assets.
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.
Supervision and Regulation
The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Corporation or its Bank subsidiary. It is intended only to briefly summarize some material provisions.
Bank Holding Company Regulation
Center Bancorp, Inc. is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “Holding Company Act”). As a bank holding company, the Parent Corporation is supervised by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file reports with the FRB and provide such additional information as the FRB may require.
On November 9, 2007, the FRB approved the Parent Corporation’s application to become a Financial Holding Company. A Financial Holding Company may perform the following activities: insurance underwriting, securities dealing and underwriting, financial and investment advisory services, merchant banking and issuing or selling security interests in bank-eligible assets. Financial Holding Companies may also engage in any other activity that the FRB determines to be financial in nature or incidental to financial activities after consultation with the Secretary of the Treasury. A Financial Holding Company may also engage in any non-financial activity that the FRB determines is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system. As of December 31, 2009, the Corporation officially rescinded its status as a financial services holding company as a result of the discontinuation of the title insurance activities.
The Holding Company Act prohibits the Corporation, with certain exceptions, from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by Center Bancorp, Inc. of more than five percent of the voting stock of any other bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy.
Acquisitions through Union Center National Bank require approval of the Office of the Comptroller of the Currency of the United States (“OCC”). The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows the Corporation to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Banking and Branching Act”) enables bank holding companies to acquire banks in states other than itstheir home state, regardless of applicable state law. The Interstate Banking and Branching Act also authorizes banks to merge across state lines, thereby creating interstate banks with branches in more than one state. Under the legislation, each state had the opportunity to “opt-out” of this provision. Furthermore, a state may “opt-in” with respect tode novo branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch. Withoutde novo branching, an out-of-state commercial bank can enter the state only by acquiring an existing bank or branch. The vast majority of states have allowed interstate banking by merger but have not authorizedde novo branching.
New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorizede novo branching into the state. However, under federal law, federal savings banks which meet certain conditions may branchde novo into a state, regardless of state law.
Regulation of Bank Subsidiary
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, and limitations on the types of investments that may be made and the types of services which may be offered.
The Bank and the OCC have entered into an informal Memorandum of Understanding, or MOU. A memorandum of understanding is characterized by the regulatory authorities as an informal action that is not published or publicly available and that is used when circumstances warrant a milder form of action than a formal supervisory action. Among other things, under the MOU, the Bank has agreed to develop a three year capital program, which will include specific plans for the maintenance of adequate capital and the strengthening of the Bank’s capital structure to meet the Bank’s current and future needs, a profit plan that includes the identification of the major areas and means by which the Board will seek to improve the Bank’s operating performance, and a dividend policy that permits the declaration of a dividend by the Bank only with the prior approval of the OCC. Management is committed to addressing and resolving the issues raised by the OCC and has substantially completed corrective actions to comply with the MOU. In addition, the OCC has established higher minimum capital ratios for the Bank than the regulatory minimums. See “FDICIA.”
Regulation W
The Federal Reserve Board has issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Parent Corporation is considered to be an affiliate of the Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:
In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:
In addition, under Regulation W:
Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository institution insured by the Federal Deposit Insurance Corp (“FDIC”) can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. These provisions have commonly been referred to as FIRREA’s “cross guarantee” provisions. Further, under FIRREA, the failure to meet capital guidelines could subject a bank to a variety of enforcement remedies available to federal regulatory authorities.
FIRREA also imposes certain independent appraisal requirements upon a bank’s real estate lending activities and further imposes certain loan-to-value restrictions on a bank’s real estate lending activities. The bank regulators have promulgated regulations in these areas.
FDICIA
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) among other things requires, each federal banking agencies to broadenagency has promulgated regulations, specifying the scope of regulatory corrective action taken with respect to banks that do not meet minimum capital requirementslevels at which a financial institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take suchcertain mandatory and discretionary supervisory actions promptlybased on the capital level of the institution. To qualify to engage in orderfinancial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.” The financial holding company of a national bank will be put under directives to minimize losses toraise its capital levels or divest its activities if the FDIC. Under FDICIA, federal banking agencies have established five capital tiers: “well capitalized”, “adequately capitalized”, and “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”.
The OCC’s regulations adopted pursuant toimplementing these provisions forof FDICIA provide that an institution towill be well capitalizedclassified as “well capitalized” if it must have(i) has a total risk-based capital ratio of at least 1010.0 percent, (ii) has a Tier I1 risk-based capital ratio of at least 66.0 percent, and(iii) has a Tier I1 leverage ratio of at least 55.0 percent, and not(iv) meets certain other requirements. An institution will be subject to any specific capital order or directive. For an institution to be adequately capitalized,classified as “adequately capitalized” if it must have(i) has a total risk-based capital ratio of at least 88.0 percent, (ii) has a Tier I1 risk-based capital ratio of at least 44.0 percent, and(iii) has a Tier I1 leverage ratio of (a) at least 44.0 percent (oror (b) at least 3.0 percent if the institution was rated 1 in some cases 3 percent). Underits most recent examination, and (iv) does not meet the regulations, andefinition of “well capitalized.” An institution will be deemed to be undercapitalizedclassified as “undercapitalized” if the bankit (i) has a total risk-based capital ratio that isof less than 88.0 percent, (ii) has a Tier I1 risk-based capital ratio that is less than 4 percent or a Tier I leverage ratio of less than 44.0 percent, (oror (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent or (b) less than 3.0 percent if the institution was rated 1 in some cases 3 percent).
In addition, significant provisions of FDICIA also directs that eachrequired federal banking agency prescriberegulators to impose standards for depository institutionsin a number of other important areas to assure bank safety and depository institution holding companies relating tosoundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation credit underwriting,and interest rate exposure, asset growth,exposure. Under the MOU between the Bank and the OCC, the bank has agreed to develop a maximum ratiothree year capital program, which will include specific plans for the maintenance of classified assets toadequate 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.
Temporary Liquidity Guarantee Program
On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (the “TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008, to strengthen confidence and encourage liquidity in the banking system. Under the original TLG Program the FDIC would guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before June 30, 2009 (the “Debt Guarantee Program”). The Debt Guarantee Program was extended for real estate lending, “truth in savings” provisions,senior unsecured debt issued after April 1, 2009 and before October 31, 2009, and maturing on or after December 31, 2012. On October 20, 2009, the requirement that depositoryFDIC established a limited, six-month emergency guarantee facility upon expiration of the Debt Guarantee Program. Under this emergency guarantee facility, certain participating entities can apply to the FDIC for permission to issue FDIC-guaranteed debt during the period starting October 31, 2009 through April 30, 2010. As of December 31, 2009, the Bank had no senior unsecured debt scheduled to mature on or before April 30, 2010.
The other provision of the TLG Program provided full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, NOW accounts paying less than 0.5 percent interest per annum and certain types of interest paying attorney trust accounts held at participating FDIC-insured 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.
through December 31, 2009 (the “Transaction Account Guarantee Program”). The Transaction Account Guarantee Program has been extended to June 30, 2010. Entities that wish to continue their participation in the Transaction Account Guarantee Program during the extension need not take any additional action. After December 31, 2009, those institutions that have not opted out of the extension will be charged an annualized rate according to the institutions risk category. The assessments will be paid each quarter and will be based on amounts over $250,000 for the portion of the quarter that the institution is assigned to the risk category. The Bank has elected to continue participation in the Transaction Account Guarantee Program.
Deposit Insurance Funds
Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“BIF”DIF”) of the FDIC.FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC also maintains anotherutilizes a risk-based assessment system that imposes insurance fund,premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating, known as a “CAMEL rating”. On December 16, 2008, the Savings Association Insurance FundFDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points (7 cents for every $100 of deposits), on an annual basis, for the first quarter of 2009. Subsequently on April 1, 2009, the FDIC issued rules which attempted to improve the methodology of the assessment system by differentiating risk among insured institutions.
On May 22, 2009, the Board of Directors of the FDIC adopted a final rule imposing a special assessment on the entire banking industry. The special assessment was calculated as 5 basis points times each insured depository institution’s assets minus Tier I capital as reported in the report of condition of June 30, 2009 and would not exceed ten times the institutions assessment base for the second quarter 2009 risk-based assessment. This special assessment, which totaled $1.2 million, was collected on September 30, 2009. Including this special assessment, the Bank paid a total of $2.1 million in FDIC assessments in 2009.
On November 12, 2009, the FDIC adopted the final rule which required insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. An institution’s prepaid assessment for the fourth quarter of 2009 and all of 2010 will be determined by multiplying the total base assessment rate that the institution would have paid for the third quarter of 2009 times the corresponding prepaid assessment base for each quarter. For each quarter of the prepayment period, an institution’s prepaid assessment base will be calculated by increasing its third quarter 2009 assessment base at an annual rate of 5 percent. An institution’s prepaid assessment for each quarter of 2011 and 2012 will be determined by multiplying its prepaid assessment rate plus .75 basis points times the corresponding prepaid assessment base for each quarter. On December 30, 2009, the Corporation remitted an FDIC prepayment in the amount of $5.7 million.
The enactment of the Emergency Economic Stabilization Act of 2008 (“SAIF”EESA”), which primarily covers temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective on October 3, 2008. On May 20, 2009, the temporary increase to $250,000 per depositor was extended through December 31, 2013. On January 1, 2014, deposit insurance coverage will return to $100,000.
In addition to deposit insurance assessments, the FDIC is required to continue to collect from institutions payments for the servicing of obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan association deposits but also covers deposits that are acquired byassociations, so long as such obligations remain outstanding. The Corporation paid a BIF-insured institution from a savings and loan association. AsFICO premium of the most recent quarterly assessment preformed by the FDIC, the Corporation had approximately $749.6 million of deposits subject to assessment at December 31, 2006, with respect to which it pays SAIF FICO Assessments.
The Gramm-Leach-Bliley Financial Modernization Act of 1999
The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in early 2000. The Modernization Act:
The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the bank’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such bank.
USA PatriotPATRIOT Act
In response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government powers to address terrorist threats through domestic security measures, surveillance powers, information sharing, and anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, the USA PATRIOT Act encourages information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other requirements, the USA PATRIOT Act imposes the following requirements with respect to financial institutions:
Sarbanes-Oxley Act of 2002
The stated goals of the Sarbanes-Oxley Act of 2002 or the SOA. The stated goals of the SOA(the “SOA”) are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties by publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 or Exchange Act.
The SOA includes specific disclosure requirements and corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC. The SOA addresses, among other matters:
Legislation Implemented in Response to TableRecent Periods of Contents
Economic TurmoilIn response to recent unprecedented market turmoil, EESA was enacted on October 3, 2008. EESA authorizes the U.S. Treasury Department (the “treasury”) to provide up to $700 billion in funding for the financial services industry. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for the Troubled Asset Relief Program (“TARP”). Of this amount, the Treasury allocated $250 billion to the TARP Capital Purchase Program. On January 15, 2009, the second $350 billion of TARP monies was released to the Treasury. As described elsewhere in this Annual Report on Form 10-K, the Treasury purchased $10,000,000 of the Parent Corporation’s non-convertible preferred stock (the “Preferred Shares”) under the TARP Capital Purchase Program.
Participants in the TARP Capital Purchase Program were required to accept several compensation-related limitations associated with this Program. In January 2009, five executive officers of the Corporation (Messrs. Weagley, Abrahamian, Shapiro and Boylan and Ms. Wunder) agreed in writing to accept the compensation standards in existence at that time under the Capital Purchase Program and thereby cap or eliminate some of their contractual or legal rights. The provisions agreed to were as follows:
| • | No Golden Parachute Payments. The term “golden parachute payment” under the TARP Capital Purchase Program (as distinguished from the definition under the Stimulus Act referred to below) refers to a severance payment resulting from involuntary termination of employment, or from bankruptcy of the employer, that exceeds three times the terminated employee’s average annual base salary over the five years prior to termination. The Corporation’s senior executive officers have agreed to forego all golden parachute payments for as long as they remain “senior executive officers” (the CEO, the CFO and the next three highest-paid executive officers) of the Corporation and the Treasury continues to hold the equity or debt securities that the Parent Corporation issued to it under the TARP Capital Purchase Program (the period during which the Treasury holds those securities is referred to herein as the “CPP Covered Period.”). |
| • | Clawback of Bonus and Incentive Compensation if Based on Certain Material Inaccuracies. Our senior executive officers agreed to a “clawback provision”. Any bonus or incentive compensation paid to them during the CPP Covered Period is subject to recovery or “clawback” by the Corporation if the payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. The senior executive officers acknowledged that each of the Corporation’s compensation, bonus, incentive and other benefit plans, arrangements and agreements (including golden parachute, severance and employment agreements) (collectively, “Benefit Plans”) with respect to them was deemed amended to the extent necessary to give effect to such clawback and the restriction on golden parachute payments. |
| • | No Compensation Arrangements That Encourage Excessive Risks. The Corporation is required to review its Benefit Plans to ensure that they do not encourage senior executive officers to take unnecessary and excessive risks that threaten the value of the Corporation. To the extent any such review requires revisions to any Benefit Plan with respect to the senior executive officers, they agreed to negotiate such changes promptly and in good faith. |
During the CPP Covered Period, the Corporation is not permitted to take federal income tax deductions for compensation paid to the senior executive officers in excess of $500,000 per year, subject to certain exceptions.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”) was enacted. The Stimulus Act contains several provisions designed to establish executive compensation and governance standards for financial institutions (such as the Corporation) that received or will receive financial assistance under TARP. In certain instances, the Stimulus Act modified the compensation-related limitations contained in the TARP Capital Purchase Program; in addition, the Stimulus Act created additional compensation-related limitations and directed the Treasury to establish standards for executive compensation applicable to participants in TARP. In their January 2009 agreements, the Corporation’s executives did not waive their rights with respect to the provisions implemented by the Stimulus Act; other employees now covered by these provisions were not asked and did not agree to waive their rights. The compensation-related limitations applicable to the Corporation which have been added or modified by the Stimulus Act are as follows, which provisions are expected to be included in standards established by the Treasury:
| • | No Severance Payments. Under the Stimulus Act, the term “golden parachutes” is defined to include any severance payment resulting from involuntary termination of employment, except for payments for services performed or benefits accrued. Under the Stimulus Act, the Corporation is prohibited from making any severance payment to its “senior executive officers” (defined in the Stimulus Act as the five highest paid senior executive officers) and the Corporation’s next five most highly compensated employees during the period that the Preferred Shares are outstanding. |
| • | Recovery of Incentive Compensation if Based on Certain Material Inaccuracies. The Stimulus Act contains the “clawback provision” discussed above but extends its application to any bonus awards and other incentive compensation paid to any of the Corporation’s senior executive officers and the next 20 most highly compensated employees during the period that the Preferred Shares are outstanding that is later found to have been based on materially inaccurate financial statements or other materially inaccurate measurements of performance. |
| • | No Compensation Arrangements That Encourage Earnings Manipulation. Under the Stimulus Act, during the period that the Preferred Shares are outstanding, the Corporation is prohibited from entering into compensation arrangements that encourage manipulation of the reported earnings of the Corporation to enhance the compensation of any of the Corporation’s employees. |
| • | Limit on Incentive Compensation. The Stimulus Act contains a provision that prohibits the payment or accrual of any bonus, retention award or incentive compensation to the Corporation’s highest paid employee while the Preferred Shares are outstanding other than awards of long-term restricted stock that (i) do not fully vest while the Preferred Shares are outstanding, (ii) have a value not greater than one-third of the total annual compensation of such employee and (iii) are subject to such other restrictions as will be determined by the Treasury. The prohibition on bonuses does not preclude payments required under written employment contracts entered into on or prior to February 11, 2009. |
| • | Compensation Committee Functions. The Stimulus Act requires that the Parent Corporation’s Compensation Committee be comprised solely of independent directors and that it meet at least semiannually to discuss and evaluate the Corporation’s employee compensation plans in light of an assessment of any risk posed to the Corporation from such compensation plans. |
| • | Compliance Certifications. The Stimulus Act requires an annual written certification by the Parent Corporation’s chief executive officer and chief financial officer with respect to the Corporation’s compliance with the provisions of the Stimulus Act. |
| • | Treasury Review of Excessive Bonuses Previously Paid. The Stimulus Act directs the Treasury to review all compensation paid to the Corporation’s senior executive officers and its next 20 most highly compensated employees to determine whether any such payments were inconsistent with the purposes of the Stimulus Act or were otherwise contrary to the public interest. If the Treasury makes such a finding, the Treasury is directed to negotiate with the Parent Corporation and the applicable employee for appropriate reimbursements to the federal government with respect to the compensation and bonuses. |
| • | Say on Pay. Under the Stimulus Act, the Corporation is required to have an advisory “say on pay vote” by the shareholders on executive compensation at the Corporation’s shareholder meetings during the period that the Preferred Shares are outstanding. This requirement applied to the Corporation’s 2009 annual meeting of shareholders and will apply to the 2010 annual meeting of shareholders. |
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.
Loans to Related Parties
The Corporation’s authority to extend credit to its directors and executive officers, as well as to entities controlled by such persons, is currently governed by the requirements of the National Bank Act, the SOASarbanes-Oxley Act of 2002 and Regulation O of the FRB.Federal Reserve Bank. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other
unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Corporation’s capital. In addition, the Corporation’s Board of Directors must approve extensions of credit in excess of certain limits. Under the SOA, the Corporation and its subsidiaries, other than Union Center National Bank, may not extend or arrange for any personal loans to its directors and executive officers.
Dividend Restrictions
The Parent Corporation is a legal entity separate and distinct from the Bank. Virtually all of the revenue of the Parent Corporation available for payment of dividends on its capital stock will result from amounts paid to the Parent Corporation by the Bank. ThereAll such dividends are subject to various limitations imposed by federal laws and by regulations and policies adopted by federal regulatory agencies. As a number of statutory and regulatory restrictions applicable to the payment of dividends by national banks and bank, holding companies. First, the Bank must obtainmay not pay a dividend if it would impair the capital of the Bank. Furthermore, prior approval ofby the Comptroller of the Currency (the “Comptroller”)is required if the total of dividends declared by the Bank in anya calendar year will exceedexceeds the total of the Bank’s net profits (as defined and interpreted by regulation) for that year andcombined with the retained profits (as defined) for the two preceding two years, less any required transfers to surplus. Second,years. The Company’s current MOU provides that the Bank cannot pay dividends unless, afterdeclare a dividend without the prior approval of the OCC.
On January 9, 2009, as part of the TARP Capital Purchase Program, the Parent Corporation entered into a Letter Agreement (the “Letter Agreement”) and a Securities Purchase Agreement — Standard Terms attached thereto (the “Securities Purchase Agreement”) with the Treasury, pursuant to which (i) the Parent Corporation issued and sold, and the Treasury purchased, 10,000 shares of the Parent Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, for an aggregate purchase price of $10,000,000 in cash, and (ii) the Parent Corporation issued to the Treasury a ten-year warrant (the “Warrant”) to purchase up to 173,410 shares of the Corporation’s common stock at an exercise price of $8.65 per share. The Securities Purchase Agreement contains limitations on the payment of such dividends capital would be unimpaired and remaining surplus would equal 100%on the common stock. Specifically, the Parent Corporation is unable to declare dividend payments on the common stock (and certain preferred stock if the Corporation issues additional series of capital. Third,preferred stock) if the authorityParent Corporation is in arrears in the payment of Federal regulatorsdividends on the Preferred Shares. Further, until the third anniversary of the investment or when all of the Preferred Shares have been redeemed or transferred, the Parent Corporation is not permitted to monitorincrease the levelsamount of capital maintainedthe quarterly cash dividend above $0.09 per share, which was the amount of the last regular dividend declared by the Parent Corporation andprior to October 14, 2008.
If, in the Bank (see Item 7opinion of this Annual Report on Form 10-K and the discussion of FDICIA above), as well as the authority of such regulatorsOCC, a bank under its jurisdiction is engaged in or is about to prohibitengage in an unsafe or unsound practices,practice (which could include the payment of dividends), the OCC may require, after notice and hearing, that such bank cease and desist from such practice or, as a result of an unrelated practice, require the bank to limit dividends in the amount of dividends whichfuture. The FRB has similar authority with respect to bank holding companies. In addition, the Parent CorporationFRB and the Bank may pay.OCC have issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Regulatory pressures to reclassify and charge-offcharge off loans and 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. RegulatoryFurther, as described herein, the regulatory authorities have indicated thatestablished guidelines with respect to the maintenance of appropriate levels of capital by a bank or bank holding companiescompany under their jurisdiction. Compliance with the standards set forth in these policy statements and guidelines could limit the amount of dividends which the Parent Corporation and the Bank may pay. Under FDICIA, banking institutions which are experiencing high levels of non-performing loans and loan charge-offs should review their dividend policies. Reference is also madedeemed to Note 18 of the Notes to the Corporation’s Consolidated Financial Statements and to Item 5 of this Annual Report on Form 10-K.
Lending GuidelinesGuidelines; Real Estate Credit Management
Credit risks are an inherent part of the lending function. The Corporation has set in place specific policies and guidelines to limit credit risks. The following describes the Corporation’s credit management policy and describesidentifies 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 officeby the department heads of the different lending units 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, repayment capacity, collateral and purpose of each loan. Requests for most commercial and consumer 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 somemost cases, inspections of the project sites by independent engineering firms and/or independent consultants. 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 committees and/or board of directors. Either the president or another senior officerChairman of the BankBoard or President chairs the loan committees.
The Corporation has established its own internal loan-to-value (“LTV”) 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 | % | ||
| Commercial, Multifamily and Other Non-residential construction | 80 | % | ||
| Construction: One to Four Family Residential | 85 | % | ||
| Improved Property (excluding One to Four Family Residential) | 85 | % | ||
| Owner-Occupied One to Four Family and Home | 90 | % | ||
| * | For a permanent mortgage or home equity loan on owner occupied one to four family residential property with an LTV that exceeds 90 percent at origination, private mortgage insurance or readily marketable collateral is to be obtained. “Readily marketable collateral” means insured deposits, financial instruments and bullion in which the bank has a perfected interest. Financial instruments and bullion are to be salable under ordinary circumstances with reasonable promptness at a fair market value. |
It may be appropriate in individual cases to originate loans with loan-to-value ratios in excess of the supervisory loan-to-valueLTV limits, based on support provided by other credit factors. The President of the Bank must approve such non-conforming loans. The Bank must identify all non-conforming loans and their aggregate amount must be reported at least quarterly to the Directors’ Loan Committee. Non-conforming loans should not exceed 100% of capital, or 30% with respect to non 1one to 4four 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.
Credit quality is monitored through an internal review process, which includes a credit Risk Grading System that facilitates the early detection of problem loans. Under this grading system, all commercial loans and commercial mortgage loans are graded in accordance with the risk characteristics inherent in each loan. Problem loans include “Watch List” loans, non-accrual loans, and loans which conform to the regulatory definitions of criticized and classified loans.
A Problem Asset Report is prepared monthly and is examined by the senior management of the Bank, the Corporation’s Loan and Discount Committee and Board of Directors. This review is designed to enable management to take such actions as are considered necessary to identify and remedy problems on a timely basis.
The Bank’s internal loan review process is complimentedcomplemented by an independent loan review conducted throughout the year, under the mandate and approval of the Corporation’s Board of Directors. In addition, regularly scheduled audits performed by the Bank’s internal audit function are designed to ensure the integrity of the credit and risk monitoring systems currently in place.
Risk Elements
The risk elements identified by the Corporation 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.
An investment in Center Bancorp’sour common stock involves risks. Stockholders should carefully consider the risks described below, together with all other information contained in this Annual Report on Form 10-K, before making any purchase or sale decisions regarding Center Bancorp’sour common stock. If any of the following risks actually occur, our business, financial condition or operating results may be harmed. In that case, the trading price of Center Bancorp’sour common stock may decline, and stockholders may lose part or all of their investment in Center Bancorp’sour common stock.
We are required to take certain actions pursuant to our current MOU with the OCC, and lack of compliance could result in additional regulatory actions.
As described under “Item 1 — Business — Regulation of Bank Subsidiary,” the Bank is subject to a MOU with the OCC, pursuant to which it has agreed to take various actions to improve the Bank’s capital position and profitability. The OCC has also established higher minimum capital ratios for the Bank than the regulatory minimums. While management is committed to addressing and resolving the issues raised by the OCC and has already initiated corrective actions to comply with various requirements of the MOU, no assurances can be given that the OCC will find the Bank’s compliance plan satisfactory, or that the Bank will not be subject to further supervisory action by the OCC. We may at some point need to raise additional capital to assure compliance with mandated capital ratios and to support our continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to comply with applicable capital requirements and to further expand our operations through internal growth or acquisitions could be materially impaired.
Recent negative developments in the financial services industry and U.S. and global credit markets may continue to adversely impact our operations and results.
The general economic downturn continued throughout 2009 and is continuing into 2010. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. The competition for our deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies, like ours, have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise capital or borrow in the debt markets compared to recent years. As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and financial institution regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement actions. Negative developments in the financial services industry and the impact of new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:
We are subject to interest rate risk and variations in interest rates may negatively impact our financial performance.
We are unable to predict actual fluctuations of market interest rates with complete accuracy. Rate fluctuations are affected by many factors, including:
Changes in the interest rate environment may reduce profits. We expect that we will continue to realize income from the differential or “spread” between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. At present, we are somewhat vulnerable to increases in interest rates because if rates increase significantly, our interest-earning assets may not reprice as rapidly as our interest-bearing liabilities. Changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, levels of prepayments and cash flows as well as the market value of our securities portfolio and overall profitability.
External factors, many of which we cannot control, may result in liquidity concerns for us.
Liquidity risk is the potential that Union Center National Bank may be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.
Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, operating expenses, capital expenditures and dividend payments to shareholders.
Liquidity is derived primarily from deposit growth and retention; principal and interest payments on loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations, and access to other funding sources.
Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to market factors or an adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the turmoil faced by banking organizations in the domestic and worldwide credit markets continues. Over the last several years, the financial services industry and the credit markets generally have been materially and adversely affected by significant declines in
asset values and by a lack of liquidity. The liquidity issues have been particularly acute for regional and community banks, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
The extensive regulation and supervision to which we are subject impose substantial restrictions on our business.
Center Bancorp Inc., primarily through its principal subsidiary, Union Center National Bank, and certain non-bank subsidiaries, are subject to extensive regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole. Such laws are not designed to protect our shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Union Center National Bank is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The United States Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes, especially for the TARP Capital Purchase Program (in which the Parent Corporation is a participant). Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputational damage, which could have a material adverse effect on our business, financial condition and results of operations.
Because of our participation in the U.S. Treasury’s Capital Purchase Program, we are subject to several restrictions, including restrictions on our ability to declare or pay dividends and repurchase our shares, as well as restrictions on our executive compensation.
As a result of our participation in the U.S. Treasury’s Capital Purchase Program, our ability to declare or pay dividends on any of our capital stock is subject to restrictions. Specifically, we are unable to declare dividend payments on common, junior preferred orpari passu preferred shares if we are in arrears in the payment of dividends on the Preferred Shares. Further, until the third anniversary of the investment or when all of the Preferred Shares have been redeemed or transferred, we are not permitted to increase the cash dividends on our common stock without the U.S. Treasury’s approval. Additionally, our ability to repurchase our shares of outstanding common stock is restricted. The U.S. Treasury’s consent generally is required for us to make any stock repurchase until the third anniversary of the investment by the U.S. Treasury unless all of the Preferred Shares have been redeemed or transferred. Further, common, junior preferred orpari passu preferred shares may not be repurchased if we are in arrears in the payment of dividends on the Preferred Shares. These restrictions, as well as the dilutive effect of the warrants that we issued to the U.S. Treasury as part of the Capital Purchase Program, may have a negative effect on the market price of our common stock.
Pursuant to the terms by which we participated in the U.S. Treasury’s Capital Purchase Agreement and the terms of the American Recovery and Reinvestment Act of 2009, we and several of our senior employees are subject to substantial limitations on executive compensation and are subject to relatively new corporate governance standards. Such requirements may adversely affect our ability to attract and retain senior officers and employees who are critical to the operation of our business.
The documents that we executed with the U.S. Treasury when it purchased our Preferred Shares allow it to unilaterally change the terms of the Preferred Shares or impose additional requirements on the Corporation if there is a change in law. These changes or additional requirements could restrict our ability to conduct
business, could subject us to additional cost and expense or could change the terms of the Preferred Shares to the detriment of our common shareholders. While it may be possible for us to redeem the Preferred Shares in the event that the U.S. Treasury imposes any changes or additional requirements that we believe are detrimental, there can be no assurances that our federal regulator will approve such redemption or that we will have the ability to implement such redemption, especially in light of regulatory requirements imposed upon financial institutions seeking to redeem TARP securities.
Current levels of volatility in the capital markets are unprecedented and may adversely impact our operations and results.
The capital markets have been experiencing unprecedented volatility for more than two years. Such negative developments and disruptions have resulted in uncertainty in the financial market in general with the expectation of a continuing general economic downturn which is continuing in 2010. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our business, financial condition and results of operations or our ability to access capital.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with particular borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries, a centralized credit administration department and periodic independent reviews of outstanding loans by our loan review department. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
Our loan portfolio includes commercial real estate loans, which involve risks specific to real estate value.
Commercial real estate loans were $405.9 million, or approximately 56.7 percent of our total loan portfolio, as of December 31, 2009. Many of these loans are extended to small and medium-sized businesses. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Although many such loans are secured by real estate as a secondary form of collateral, continued adverse developments affecting real estate values in our market area could increase the credit risk associated with our loan portfolio. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties. If the loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
We may incur impairments to goodwill.
We review our goodwill at least annually. Significant negative industry or economic trends, reduced estimates of future cash flows or disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in a competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an impairment to its goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on our results of operations and our stock price.
Union Center National Bank’s ability to pay dividends is subject to regulatory limitations, which, to the extent that our holding company requires such dividends in the future, may affect our holding company’s ability to honor its obligations and pay dividends.
As a bank holding company, we areCenter Bancorp, Inc. is a separate legal entity from Union Center National Bank and its subsidiaries and dodoes not have significant operations of our own.operations. We currently depend on Union Center National Bank’s cash and liquidity to pay our operating expenses and dividends to shareholders. We cannot assure you that in the future Union Center National Bank will have the capacity to pay the necessary dividends and that we will not require dividends from Union Center National Bank to satisfy our obligations. TheVarious statutes and regulations limit the availability of dividends from Union Center National Bank is limited by various statutes and regulations.Bank. It is possible, depending upon our and Union Center National Bank’s financial condition and other factors, that bank regulators could assert that payment of dividends or other payments by Union Center National Bank are an unsafe or unsound practice. In the event that Union Center National Bank is unable to pay dividends, we may not be able to service our obligations, as they become due, or pay dividends on our commoncapital stock. Consequently, the inability to receive dividends from Union Center National Bank could adversely affect our financial condition, results of operations, cash flows and prospects.
Union Center National Bank’s allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, Union Center National Bank maintains an allowance for loan losses to provide for loan defaults and non-performance. If Union Center National Bank’s allowance for loan losses is not adequate to cover actual loan losses, future provisions for loan losses could materially and adversely affect our operating results.
Union Center National Bank is subject to various lending and other economic risks that could adversely impact our results of operations and financial condition.
Changes in economic conditions, particularly ana significant worsening of the current economic slowdown,environment, could hurt Union Center National Bank’s business. Union Center National Bank’s business is directly affected by political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in governmental monetary and fiscal policies, and inflation, all of which are beyond our control. A deteriorationDeterioration in economic conditions, particularly within New Jersey, could result in the following consequences, any of which could hurt our business materially:
Further deterioration in the real estate market, particularly in New Jersey, could hurt our business. If there is a significant decline inAs real estate values in New Jersey the collateral for Union Center National Bank’s loans will provide less security. As a result, Union Center National Bank’sdecline, our ability to recover on defaulted loans by selling the underlying real estate would be diminished, and Union Center National Bank would be more likely tois reduced, which increases the possibility that we may suffer losses on defaulted loans.
Union Center National Bank may suffer losses in its loan portfolio despite its underwriting practices.
Union Center National Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to specific underwriting practices. Although we believe that Union Center National Bank’s underwriting criteria are appropriate for the various kinds of loans that it makes, Union Center National Bank may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as reserves in its allowance for loan losses.
Union Center National Bank faces strong competition from other financial institutions, financial service companies and other organizations offering services similar to the services that Union Center National Bank provides.
Many competitors offer the same types of loans and banking services that Union Center National Bank offers or similar types of such services. These competitors include other national banks, savings associations, regional banks and other community banks. Union Center National Bank also faces competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In this regard, Union Center National Bank’s competitors include other state and national banks and major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations, offer a broader suite of services and mount extensive promotional and advertising campaigns. Our inability to compete effectively wouldmay adversely affect our business.
If we do not successfully integrate any entitiespursue acquisitions, we may heighten the risks to our operations and financial condition.
To the extent that we undertake acquisitions or new branch openings, we may acquireexperience the effects of higher operating expenses relative to operating income from the new operations, which may have a material adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business. To the extent that we grow through acquisitions and branch openings, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses involve similar risks to those commonly associated with branching, but may also involve additional risks, including:
Attractive acquisition opportunities may not be available to us in the future.
We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators will consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.
Further increases in FDIC premiums could have a material adverse effect on our future earnings.
The FDIC insures deposits at FDIC insured financial institutions, including Union Center National Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at an adequate level. In light of current economic conditions, the FDIC has increased its assessment rates and imposed special assessments. The FDIC may further increase these rates and impose additional special assessments in the future, the combined companywhich could have a material adverse effect on future earnings.
Declines in value may adversely impact our investment portfolio.
As of December 31, 2009, we had approximately $298.1 million in available for sale investment securities. We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the ability of Union Center National Bank to upstream dividends to us, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios.
Concern of customers over deposit insurance may cause a decrease in deposits.
With recent increased concerns about bank failures, customers increasingly are concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is fully insured. Decreases in deposits may adversely affected.
We have a continuing need for technological change and we may consummate innot have the resources to effectively implement new technology.
The financial services industry is constantly undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part onupon our ability to integrateaddress the acquired entities intoneeds of our existing franchise, including,customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in certain circumstances, our
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to centralize certain administrative functionsprotect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and eliminate unnecessary duplicationother disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other functions. Wedisruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may experience difficultiesresult in accomplishing this integration or in effectively managingsignificant liability to us and may cause existing and potential customers to refrain from doing business with us. A failure of the combined company. Any actual cost savings or revenue enhancements thatsecurity measures we may anticipate will dependuse could have a material adverse effect on future expense levelsour financial condition and operating results the timing of certain events and general industry, regulatory and business conditions. Many of these events will be beyond our control, and we cannot provide assurances that the integration of businesses that we may acquire will be successful.
The Bank’s operations are located at nine sites in Union County, New Jersey, consisting of five sites in Union Township, one in Springfield Township, one in Berkeley Heights, one in Vauxhall and one in Summit, New Jersey. The Bank also has fivethree sites in Morris County, New Jersey, consisting of one site in Madison, one site in Boonton/Mountain Lakes, and three sitesone site in Morristown, New Jersey. The principal office is located at 2455 Morris Avenue, Union, New Jersey. The principal office is a two story building constructed in 1993. On October 9, 2004, the Bank opened a 19,555 square foot office facility on Springfield Road in Union, New Jersey, which serves as the Bank’s Operations and Data Center. On October 1, 2004February 27, 2008, the Corporation
signed an agreement to purchaselease premises at 44105 North Avenue, Cranford, New Jersey to be used to construct a full service branch facility. Subsequently, the Corporation exercised its optionhas notified the landlord that it wanted to cancel that contract on January 12, 2007. On October 28, 2005,terminate the Corporation signed an agreement to lease a branch facility to be constructed at 209 Ridgedale Avenue, Florham Park, New Jersey.
The lease of the Five Points Branch located at 356 Chestnut Street, Union, New Jersey expires November 30, 2007 and is subject to renewal atfollowing table sets forth certain information regarding the Bank’s option. leased locations.
| | |
| Branch Location | Term | |
| 356 Chestnut Street, Union, New Jersey | Term expires in 2028 with renewal options | |
| Career Center Branch located in Union High School, Union, New Jersey | Term expired in October 2008, currently on month to month lease | |
| 300 Main Street, Madison, New Jersey | Term expires June 6, 2010 and is subject to renewal at the Bank’s option | |
| 2933 Vauxhall Road, Vauxhall, New Jersey | Term expires January 31, 2013 and is subject to renewal at the Bank’s option | |
| 392 Springfield Avenue, Summit, New Jersey | Term expired March 31, 2009 and was subject to renewal at the Bank’s option; however, the Bank advised the landlord that it did not intend to renew this lease. | |
| 545 Morris Avenue, Summit, New Jersey | Term expires February 1, 2024, subject to renewal at the Bank’s option | |
| Ely Place, Boonton, New Jersey | Term expires August 29, 2021, and is subject to renewal at the Bank’s option |
The lease of the Career Center Branch located in Union High School expires October 31, 2008. The lease of the Madison office located at 300 Main Street, Madison, New Jersey expires June 6, 2010 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 January 31, 2013 and is subject to renewal at the Bank’s option. The lease of the Morristown office located at 86 South Street, Suite 2A, Morristown, New Jersey expires February 28, 2008 and is subject to renewal at the Bank’s option. The lease on the Red Oak banking Center located at 190 Park Avenue, Morristown, New Jersey expires October 28, 2015 and is subject to renewal at the Bank’s option. The lease of the Summit branch located at 392 Springfield Avenue, Summit, New Jersey expires March 31, 2009 and is subject to renewal at the Bank’s option. The lease for the Boonton/Mountain Lakes office located at Ely Place, Boonton, New Jersey expires 15 years from the commencement or date of occupancy, August 29, 2006, and is subject to renewal at the Bank’s option. In 2005 the Corporation signed an agreement to leaseBank operates a Bank branch to be built at 209 Ridgedale Avenue, Florham Park, New Jersey. The Drive In/Walk Up located at 2022 Stowe Street, Union, New Jersey, is adjacent to a part of the Center Office facility. The Bank has fivethree off-site ATM locations. One at is located at Union Hospital, 100 Galloping Hill Road, Union, New Jersey, threeTwo are located at New Jersey Transit stations;stations and one is located at the Boys and Girls Club of Union, 1050 Jeanette Avenue, Union, New Jersey.
On January 12, 2010, the Bank entered into a sale/purchase agreement for its 1180 Springfield Road facility. Under the terms of the agreement the premises will be leased with an option to buy. The agreement is expected to be fully consummated in the second quarter of 2010.
Item 3. Legal Proceedings
In December 2009, the Corporation took steps to terminate a participation agreement with another New Jersey bank at December 31, 2009. Under the terms of the agreement, the participation ended on December 31, 2009, and, in the Corporation’s view, the lead bank is required to repurchase the remaining balance. The lead bank questioned our enforcement of the participation agreement. Therefore, the Corporation filed suit in Superior Court of New Jersey Chancery Division in Morris County, New Jersey, for the return of the outstanding principal and has reclassified the outstanding loan into other assets on its balance sheet.
Union Center has instituted a suit against Highlands State Bank (“Highlands”) in the Superior Court of New Jersey (Docket No. MRS-C-189-09). This litigation relates to a participating interest in a construction loan originated by Highlands. This loan was closed, and the participating interest (85%) was acquired, in 2007. Various causes of action are pleaded in this litigation by both parties, including claims for recovery of damages. The primary claim prosecuted by Union Center seeks a judicial determination that the Participation Agreement executed with Highlands was properly terminated in accordance with its terms on December 31, 2009 and that Highlands is obligated to return the unpaid balance of the loan funds advanced by Union Center during its participation in the loan. The primary claim presented by Highlands is that Union Center’s participation in the loan must continue until it is ultimately retired, which will probably result in a substantial loss that it is claimed must be shared by Union Center. This litigation is in its early stages. The initial pleadings have been filed and the discovery phase will now begin.
There are no other significant pending legal proceedings involving the Parent Corporation or the 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 process.
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 | ||
| Anthony C. Weagley Age – | 1996 the Parent Corporation 1985 the Bank | President and Chief Executive Officer of the Parent Corporation (April 2008 – Present); President, Chief Executive Officer and Chief Financial Officer of the Parent Corporation (August 2007 – March 2008); President and Chief Executive Officer of the Bank (March 2008 – Present); President, Chief Executive Officer and Chief Financial Officer of the Bank (August 2007 – February 2008); Vice President & Treasurer of the Parent Corporation (1996 – August 2007); Senior Vice President & Cashier of the Bank (1996 – August 2007); Vice President & Cashier | ||
| William Boylan Age – 45 | ||||
| Vice President of the Parent Corporation (July 2008 – Present); Senior Vice President of the Bank ; Vice President of the Bank (December 2007 – January 2008); Senior Vice President, | ||||
| Mark S. Cardone Age – 47 | ||||
| Vice President of the Parent Corporation and Senior Vice President | ||||
| Julie D’Aloia Age – 48 | 1999 the Parent Corporation 1998 the Bank | Vice President of the Parent Corporation (2001 – Present); Secretary of the Parent Corporation (1998 – Present); Corporate Secretary of the Parent Corporation (1998 – August 2007); Senior Vice President of the Bank (2001 – Present); Secretary of the Bank (1998 – Present); Assistant-To-The-President of the Bank (1995 – August 2007); Corporate Secretary of the Bank (1998 – August 2007) | ||
| Joseph D. Gangemi Age – 29 | 2008 the Parent Corporation 2004 the Bank | Executive Assistant to Chief Executive Officer, Investor Relations Officer and Corporate Secretary of the Parent Corporation and the Bank (June 2008 – Present); Executive Assistant to Chief Executive Officer and Investor Relations Officer of the Bank (January 2008 – June 2008); Executive Assistant to Chief Executive Officer of the Bank (August 2007 – January 2008); Executive Assistant to Chief Financial Officer of the Bank (August 2005 – August 2007); Finance Assistant of the Bank (November 2004 – August 2005); Teller of the Bank (February 2004 – November 2004) |
| | | ||
| Name and Age | Officer Since | Business Experience | ||
| Ronald Shapiro Age – 58 | 2008 the Parent Corporation 2007 the Bank | Vice President and Senior Lending Officer of the Parent Corporation (July 2008 – Present); Senior Vice President and Senior Lending Officer of the Bank (July 2008 – Present); Vice President of the Bank (October 2007 – July 2008); Director of Lender Services, The Schonbraun McCann Group (real estate finance consulting firm) (February 2006 – August 2007); and Director and Mid Atlantic Regional Manager of Artesia Mortgage Capital Corporation (August 2004 – December 2005) | ||
| Lori A. Wunder Age – | 1998 the Parent Corporation 1995 the Bank | Vice President of the Parent Corporation | ||
Vice President of the Bank |
Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
Security Market Information
The common stock of the Parent Corporation is traded on the NASDAQ Global Select Market. The Corporation’s symbol is CNBC. As of December 31, 2006,2009, the Corporation had 717 common registered605 stockholders of record. This does not include beneficial owners for whom CEDE & Company or others act as nominees. On December 31, 2006,2009, the closing low market bid and asked price was $15.79–$15.82,were $8.92 and $9.07, respectively.
The following table sets forth the high and low bid price, and the dividends declared, on a share of the Corporation’s common stock for the periods presented.years ended December 31, 2009 and 2008. All amounts are adjusted for prior stock splits and stock dividends.
| | | | | | | ||||||||||||||||||
| Common Stock Price | Common Dividends Declared | |||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
| High Bid | Low Bid | High Bid | Low Bid | 2009 | 2008 | |||||||||||||||||||
| Fourth Quarter | $ | 9.20 | $ | 7.36 | $ | 10.15 | $ | 7.45 | $ | 0.0300 | $ | 0.0900 | ||||||||||||
| Third Quarter | 10.16 | 7.53 | 10.96 | 8.44 | 0.0300 | 0.0900 | ||||||||||||||||||
| Second Quarter | 9.15 | 6.88 | 10.38 | 8.45 | 0.0300 | 0.0900 | ||||||||||||||||||
| First Quarter | 8.50 | 6.43 | 11.32 | 9.95 | 0.0900 | 0.0900 | ||||||||||||||||||
| Total | $ | 0.1800 | $ | 0.3600 | ||||||||||||||||||||
Common Stock Price | Common Dividends Declared | |||||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||
High Bid | Low Bid | High Bid | Low Bid | |||||||||||||||
| Fourth Quarter | $ | 16.22 | $ | 15.60 | $ | 11.85 | $ | 10.70 | $ | 0.0900 | $ | 0.0900 | ||||||
| Third Quarter | $ | 16.39 | $ | 14.10 | $ | 11.83 | $ | 10.84 | $ | 0.0900 | $ | 0.0900 | ||||||
| Second Quarter | $ | 14.25 | $ | 11.70 | $ | 12.00 | $ | 10.95 | $ | 0.0900 | $ | 0.0900 | ||||||
| First Quarter | $ | 12.17 | $ | 10.85 | $ | 12.04 | $ | 10.89 | $ | 0.0900 | $ | 0.0857 | ||||||
| $ | 0.3600 | $ | 0.3557 | |||||||||||||||
Share Repurchase Program
Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warrant,warranted, in the open market or in privately negotiated transactions. Shares repurchased will be added to the corporate treasury and will bewere used for future stock dividends and other issuances. As of December 31, 2006,2009, Center Bancorp had 13.214.6 million shares of common stock outstanding. As of December 31, 2006,2009, the Parent Corporation had purchased 326,9081,386,863 common shares at an average cost per share of $11.95$11.44 under the above-mentioned stock buyback program.programs announced in 2006, 2007 and 2008. No repurchases were made during 2009. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholder’sstockholders’ equity.
Information concerning the stock repurchases for the twelvethree months ended December 31, 20062009 is set forth below.
| | | | | ||||||||||||
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| October 1, through October 31, 2009 | — | $ | — | 1,386,863 | 652,868 | |||||||||||
| November 1, through November 30, 2009 | — | — | 1,386,863 | 652,868 | ||||||||||||
| December 1, through December 31, 2009 | — | — | 1,386,863 | 652,868 | ||||||||||||
| Total | — | $ | — | 1,386,863 | 652,868 | |||||||||||
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs | |||||
| Balance December 31, 2005 | 57,330 | $ | 9.38 | 57,330 | 614,472 | ||||
| January 1, through March 31, 2006 | — | — | — | 614,472 | |||||
| April 1, through June 30, 2006 | 208,304 | $ | 12.36 | 265,634 | 406,168 | ||||
| July 1, through September 30, 2006 | 61,274 | $ | 12.95 | 326,908 | 344,894 | ||||
| October 1, December 1 through December 31, 2006 | 0 | — | — | 344,894 | |||||
| Balance at December 31, 2006 | 326,908 | $ | 11.95 | 326,908 | 344,894 | ||||
As noted elsewhere herein, on January 9, 2009, as part of the NotesU.S. Department of the Treasury’s Troubled Asset Relief Program (“TARP”), the Parent Corporation entered into an agreement with the U.S. Treasury (the “Stock Purchase Agreement”) pursuant to Consolidated Financial Statements. The following table gives information aboutwhich (i) the Parent Corporation issued and sold, and the U.S. Treasury purchased, 10,000 shares (the “Preferred Shares”) of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share for an aggregate purchase price of $10 million in cash, and (ii) the Parent Corporation issued to the U.S. Treasury a ten-year warrant (the “Warrant”) to purchase up to 173,410 shares of the Parent Corporation’s Common Stock that maycommon stock at an exercise price of $8.65 per share. As a result of the successful completion of the Rights Offering in October 2009, the number of shares underlying the warrant held by the U.S. Treasury was reduced to 86,705 shares or 50 percent of the original 173,410 shares. Until the third anniversary of the issuance of the Preferred Shares, the consent of the U.S. Treasury will be issued uponrequired for any increase in the exercise of options, warrants and rights underdividends on the Parent Corporation’s 1999 Incentive Plan, 1993 Employee Stock Option Plan, 1993 Outside Director Stock Option Plan and 2003 Non-Employee Director Stock Option Plan ascommon stock or for any stock repurchases unless the Preferred Shares have been redeemed in their entirety or the U.S. Treasury has transferred the Preferred Shares to third parties. See “Dividends” below for additional restrictions on the payment of December 31, 2006. These plans were the Corporation’s only equity compensation plans in existence as of December 31, 2006.
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||
| Equity Compensation Plans Approved by Shareholders | 250,978 | $6.37 – $15.88 | 672,461 | |||
| Equity Compensation Plans Not Approved by Shareholders | — | — | — | |||
| Total | 250,978 | $6.37 – $15.88 | 672,461 |
Dividends
Federal laws and regulations contain restrictions on the ability of the Parent Corporation and Union Center National Bank to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, “Business—“Business — Dividend Limitations” and Part II, Item 8, “Financial Statements and Supplementary Data—Data — Dividend Restrictions, Note 1817 of the Notes to Consolidated Financial Statements.” Pursuant to the MOU between Union Center National Bank and the OCC, the Bank may not declare dividends without the prior approval of the OCC. In addition, under the terms of the trust preferred securities issued by Center Bancorp, Inc,Inc. Statutory Trust II, the Parent Corporation can not pay dividends on its common stock if the Corporation defers payments on the junior subordinated debentures which provide the cash flow for the payments on the trust preferred securities. Further, pursuant to the Stock Purchase Agreement, the Parent Corporation is unable to declare dividend payments on the Parent Corporation’s common stock (and certain preferred stock if the Parent Corporation issues additional series of preferred stock) if the Parent Corporation is in arrears in the payment of dividends on the Preferred Shares issued to the U.S. Treasury. Further, until the third anniversary of the U.S. Treasury’s investment or when all of the Preferred Shares have been redeemed or transferred, the Parent Corporation is not permitted to increase the amount of the quarterly cash dividend above $0.09 per share, which was the amount of the last regular dividend declared by the Parent Corporation prior to October 14, 2008.
Stockholders Return Comparison
Set forth below is a line graph presentation comparing the cumulative stockholder return on the Parent Corporation’s Common Stock,common stock, on a dividend reinvested basis, against the cumulative total returns of the Standard & Poor’s 500 Stock IndexComposite and the Hemscott, Inc. General Industry GroupSNL Mid-Atlantic Bank Index for the period from January 1, 20022005 through December 31, 2006.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CENTER BANCORP INC.,
S&P COMPOSITE AND SNL MID-ATLANTIC BANK INDEX
Assumes $100 invested on January 1, 2005
Assumes dividends reinvested
Year ended December 31, 2009
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
| | | | | | | ||||||||||||||||||
| Fiscal Year Ending | ||||||||||||||||||||||||
| Company/Index/Market | 12/31/2004 | 12/31/2005 | 12/31/2006 | 12/31/2007 | 12/31/2008 | 12/31/2009 | ||||||||||||||||||
| Center Bancorp, Inc. | 100.0 | 90.5 | 134.3 | 101.1 | 77.6 | 87.3 | ||||||||||||||||||
| S&P Composite | 100.0 | 105.7 | 121.9 | 128.5 | 81.3 | 109.8 | ||||||||||||||||||
| SNL Mid-Atlantic Bank Index | 100.0 | 101.8 | 122.1 | 92.4 | 50.9 | 53.6 | ||||||||||||||||||
FISCAL YEAR ENDING | ||||||||||||
COMPANY/INDEX/MARKET | 12/31/2001 | 12/31/2002 | 12/31/2003 | 12/31/2004 | 12/30/2005 | 12/29/2006 | ||||||
| Center Bancorp Inc | 100.00 | 134.60 | 228.89 | 163.69 | 148.20 | 219.90 | ||||||
| Regional-Mid-Atlantc Bnks | 100.00 | 95.63 | 121.89 | 139.01 | 140.08 | 157.76 | ||||||
| S&P Composite | 100.00 | 77.90 | 100.25 | 111.15 | 116.61 | 135.03 | ||||||
SUMMARY OF SELECTED STATISTICAL INFORMATION AND FINANCIAL DATA
| | | | | | |||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005(3) | ||||||||||||||||
| (Dollars in Thousands, Except per Share Data) | ||||||||||||||||||||
| Summary of Income | ||||||||||||||||||||
| Interest income | $ | 51,110 | $ | 49,894 | $ | 52,129 | $ | 53,325 | $ | 50,503 | ||||||||||
| Interest expense | 22,645 | 24,095 | 30,630 | 28,974 | 23,296 | |||||||||||||||
| Net interest income | 28,465 | 25,799 | 21,499 | 24,351 | 27,207 | |||||||||||||||
| Provision for loan losses | 3,261 | 1,561 | 350 | 57 | — | |||||||||||||||
| Net interest income after provision for loan losses | 25,204 | 24,238 | 21,149 | 24,294 | 27,207 | |||||||||||||||
| Other income | 3,906 | 2,644 | 4,372 | 633 | 3,836 | |||||||||||||||
| Other expense | 23,057 | 19,473 | 24,598 | 24,358 | 22,213 | |||||||||||||||
| Income before income tax expense | 6,053 | 7,409 | 923 | 569 | 8,830 | |||||||||||||||
| Income tax expense (benefit) | 1,480 | 1,567 | (2,933 | ) | (3,329 | ) | 1,184 | |||||||||||||
| Net income | $ | 4,573 | $ | 5,842 | $ | 3,856 | $ | 3,898 | $ | 7,646 | ||||||||||
| Net income available to common stockholders | $ | 4,006 | $ | 5,842 | $ | 3,856 | $ | 3,898 | $ | 7,646 | ||||||||||
| Statement of Financial Condition Data | ||||||||||||||||||||
| Investments | $ | 298,124 | $ | 242,714 | $ | 314,194 | $ | 381,733 | $ | 517,730 | ||||||||||
| Total loans | 715,453 | 676,203 | 551,669 | 550,414 | 505,826 | |||||||||||||||
| Goodwill and other intangibles | 17,028 | 17,110 | 17,204 | 17,312 | 17,437 | |||||||||||||||
| Total assets | 1,196,824 | 1,023,293 | 1,017,645 | 1,051,384 | 1,114,829 | |||||||||||||||
| Deposits | 813,705 | 659,537 | 699,070 | 726,771 | 700,601 | |||||||||||||||
| Borrowings | 269,253 | 268,440 | 218,109 | 206,434 | 293,963 | |||||||||||||||
| Stockholders’ equity | 102,551 | 81,713 | 85,278 | 97,613 | 99,489 | |||||||||||||||
| Dividends | ||||||||||||||||||||
| Cash dividends | $ | 2,434 | $ | 4,675 | $ | 4,885 | $ | 4,808 | $ | 4,518 | ||||||||||
| Dividend payout ratio | 60.76 | % | 80.02 | % | 126.69 | % | 123.35 | % | 59.09 | % | ||||||||||
| Cash Dividends Per Share(1) | ||||||||||||||||||||
| Cash dividends | $ | 0.18 | $ | 0.36 | $ | 0.36 | $ | 0.34 | $ | 0.34 | ||||||||||
| Earnings Per Share(1) | ||||||||||||||||||||
| Basic | $ | 0.30 | $ | 0.45 | $ | 0.28 | $ | 0.28 | $ | 0.60 | ||||||||||
| Diluted | $ | 0.30 | $ | 0.45 | $ | 0.28 | $ | 0.28 | $ | 0.60 | ||||||||||
| Weighted Average Common Shares Outstanding(1) | ||||||||||||||||||||
| Basic | 13,382,614 | 13,048,518 | 13,780,504 | 13,959,684 | 12,678,614 | |||||||||||||||
| Diluted | 13,385,416 | 13,061,410 | 13,840,756 | 14,040,338 | 12,725,256 | |||||||||||||||
| Operating Ratios | ||||||||||||||||||||
| Return on average assets | 0.37 | % | 0.58 | % | 0.38 | % | 0.37 | % | 0.69 | % | ||||||||||
| Average stockholders’ equity to average assets | 7.67 | % | 8.28 | % | 9.33 | % | 9.21 | % | 7.79 | % | ||||||||||
| Return on average stockholders’ equity | 4.87 | % | 7.03 | % | 4.09 | % | 4.04 | % | 8.91 | % | ||||||||||
| Return on average tangible stockholders’ equity(2) | 5.96 | % | 8.86 | % | 5.00 | % | 4.93 | % | 10.34 | % | ||||||||||
| Book Value | ||||||||||||||||||||
| Book value per common share(1) | $ | 6.38 | $ | 6.29 | $ | 6.48 | $ | 7.02 | $ | 7.05 | ||||||||||
| Tangible book value per common share(1)(2) | $ | 5.21 | $ | 4.97 | $ | 5.17 | $ | 5.77 | $ | 5.82 | ||||||||||
| Non-Financial Information | ||||||||||||||||||||
| Common stockholders of record | 605 | 640 | 679 | 717 | 767 | |||||||||||||||
| Full-time equivalent staff | 160 | 160 | 172 | 214 | 202 | |||||||||||||||
Years Ended December 31, | ||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
| (Dollars in Thousands, Except per Share Data) | ||||||||||||||||
Summary of Income | ||||||||||||||||
| Interest income(1) | $ | 53,325 | $ | 50,503 | $ | 40,049 | $ | 35,919 | $ | 40,469 | ||||||
| Interest expense | 28,974 | 23,296 | 13,968 | 12,726 | 14,522 | |||||||||||
| Net interest income(1) | 24,351 | 27,207 | 26,081 | 23,193 | 25,947 | |||||||||||
| Provision for loan losses | 57 | — | 752 | 522 | 360 | |||||||||||
| Net interest income after provision for loan losses | 24,294 | 27,207 | 25,329 | 22,671 | 25,587 | |||||||||||
| Other income | 633 | 3,836 | 3,388 | 3,247 | 3,335 | |||||||||||
| Other expense | 24,358 | 22,213 | 19,471 | 18,336 | 17,198 | |||||||||||
| Income before income tax expense | 569 | 8,830 | 9,246 | 7,582 | 11,724 | |||||||||||
| Income tax (benefit) expense | (3,329 | ) | 1,184 | 1,624 | 1,163 | 3,721 | ||||||||||
| Net income | $ | 3,898 | $ | 7,646 | $ | 7,622 | $ | 6,419 | $ | 8,003 | ||||||
Statement of Financial Condition Data | ||||||||||||||||
| Investments | $ | 381,733 | $ | 517,730 | $ | 571,127 | $ | 512,875 | $ | 533,350 | ||||||
| Total loans | 550,414 | 505,826 | 377,304 | 349,525 | 229,051 | |||||||||||
| Goodwill and other intangibles | 17,312 | 17,437 | 2,091 | 2,091 | 2,091 | |||||||||||
| Total assets | 1,051,384 | 1,114,829 | 1,009,015 | 922,289 | 823,436 | |||||||||||
| Deposits | 726,771 | 700,601 | 702,272 | 632,921 | 616,351 | |||||||||||
| Borrowings | 206,434 | 293,963 | 216,357 | 214,724 | 140,431 | |||||||||||
| Stockholders’ equity | $ | 97,613 | $ | 99,489 | $ | 68,643 | $ | 54,180 | $ | 51,054 | ||||||
Dividends | ||||||||||||||||
| Cash dividends | $ | 4,808 | $ | 4,518 | $ | 3,238 | $ | 3,014 | $ | 2,747 | ||||||
| Dividend payout ratio | 123.35 | % | 59.09 | % | 42.48 | % | 46.95 | % | 34.32 | % | ||||||
Cash Dividends Per Share(2) | ||||||||||||||||
| Cash dividends | $ | 0.36 | $ | 0.36 | $ | 0.34 | $ | 0.32 | $ | 0.31 | ||||||
Earnings Per Share(2) | ||||||||||||||||
| Basic | $ | 0.29 | $ | 0.63 | $ | 0.79 | $ | 0.69 | $ | 0.86 | ||||||
| Diluted | $ | 0.29 | $ | 0.63 | $ | 0.78 | $ | 0.68 | $ | 0.86 | ||||||
Weighted Average Common Shares Outstanding | ||||||||||||||||
| Basic | 13,294,937 | 12,074,870 | 9,679,880 | 9,344,122 | 9,253,814 | |||||||||||
| Diluted | 13,371,750 | 12,119,291 | 9,737,706 | 9,441,972 | 9,328,213 | |||||||||||
Operating Ratios | ||||||||||||||||
| Return on average assets | 0.37 | % | 0.69 | % | 0.81 | % | 0.74 | % | 1.07 | % | ||||||
| Average stockholders’ equity to average assets | 9.21 | % | 7.79 | % | 6.14 | % | 5.96 | % | 6.46 | % | ||||||
| Return on average equity | 4.04 | % | 8.91 | % | 13.17 | % | 12.35 | % | 16.58 | % | ||||||
| Return on tangible average stockholders’ equity(3) | 4.93 | % | 10.34 | % | 13.67 | % | 12.87 | % | 17.33 | % | ||||||
Book Value | ||||||||||||||||
| Book value per common share(2) | $ | 7.37 | $ | 7.41 | $ | 6.59 | $ | 5.77 | $ | 5.50 | ||||||
| Tangible book value per common share(3) | $ | 6.06 | $ | 6.11 | $ | 6.39 | $ | 5.54 | $ | 5.27 | ||||||
Non-Financial Information | ||||||||||||||||
| Common stockholders of record | 717 | 767 | 529 | 527 | 542 | |||||||||||
| Staff-Full time equivalent | 214 | 202 | 192 | 191 | 182 | |||||||||||
Notes to Selected Financial Data
| (1) | All common share and per common share amounts have been adjusted for prior stock splits and stock dividends. |
| (2) | Tangible book value per common share, which is a non-GAAP financial measure, is computed by dividing stockholders’ equity less preferred stock, goodwill and other intangible assets by common shares outstanding. The following table provides certain related reconciliations between Generally Accepted Accounting Principles (“GAAP”)measures (stockholders’ equity and book value per common share) and the related non-GAAP financial measures (tangible stockholders’ equity and tangible book value per common share): |
| | | | | | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in Thousands, Except per Share Data) | ||||||||||||||||||||
| Common shares outstanding | 14,572,029 | 12,991,312 | 13,155,784 | 13,910,450 | 14,103,209 | |||||||||||||||
| Stockholders’ equity | $ | 102,551 | $ | 81,713 | $ | 85,278 | $ | 97,613 | $ | 99,489 | ||||||||||
| Less: Preferred Stock | 9,619 | — | — | — | — | |||||||||||||||
| Less: Goodwill and other intangible assets | 17,028 | 17,110 | 17,204 | 17,312 | 17,437 | |||||||||||||||
| Tangible Stockholders’ Equity | $ | 75,904 | $ | 64,603 | $ | 68,074 | $ | 80,301 | $ | 82,052 | ||||||||||
| Book value per common share | $ | 6.38 | $ | 6.29 | $ | 6.48 | $ | 7.02 | $ | 7.05 | ||||||||||
| Less: Goodwill and other intangible assets | 1.17 | 1.32 | 1.31 | 1.25 | 1.23 | |||||||||||||||
| Tangible Book Value per Common Share | $ | 5.21 | $ | 4.97 | $ | 5.17 | $ | 5.77 | $ | 5.82 | ||||||||||
All per common share amounts reflect all prior stock splits and dividends.
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||
| (Dollars in Thousands, Except per Share Data) | |||||||||||||||
| Common shares outstanding | 13,248,406 | 13,431,628 | 10,418,474 | 9,391,664 | 9,283,833 | ||||||||||
| Stockholders’ equity | $ | 97,613 | $ | 99,489 | $ | 68,643 | $ | 54,180 | $ | 51,054 | |||||
| Less: Goodwill and other intangible assets | 17,312 | 17,437 | 2,091 | 2,091 | 2,091 | ||||||||||
| Tangible Stockholders’ Equity | $ | 80,301 | $ | 82,052 | $ | 66,552 | $ | 52,089 | $ | 48,963 | |||||
| Tangible Book Value | $ | 6.06 | $ | 6.11 | $ | 6.39 | $ | 5.54 | $ | 5.27 | |||||
| All per common share amounts reflect all prior stock splits and dividends. | |||||||||||||||
Return on average tangible stockholders’ equity, which is a non-GAAP financial measure, is computed by dividing net income by average stockholders’ equity less average goodwill and average other intangible assets,assets. The following table reflects a reconciliation between average stockholders’ equity and average tangible stockholders’ equity and a reconciliation between return on stockholders’ equity and return on average tangible stockholders’ equity.
| | | | | | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Net income | $ | 4,573 | $ | 5,842 | $ | 3,856 | $ | 3,898 | $ | 7,646 | ||||||||||
| Average stockholders’ equity | $ | 93,853 | $ | 83,123 | $ | 94,345 | $ | 96,505 | $ | 85,772 | ||||||||||
| Less: Average goodwill and other intangible assets | 17,069 | 17,158 | 17,259 | 17,378 | 11,814 | |||||||||||||||
| Average Tangible Stockholders’ Equity | $ | 76,784 | $ | 65,965 | $ | 77,086 | $ | 79,127 | $ | 73,958 | ||||||||||
| Return on average stockholders’ equity | 4.87 | % | 7.03 | % | 4.09 | % | 4.04 | % | 8.91 | % | ||||||||||
| Add: Average goodwill and other intangible assets | 1.09 | 1.83 | 0.91 | 0.89 | 1.43 | |||||||||||||||
| Return on Average Tangible Stockholders’ Equity | 5.96 | % | 8.86 | % | 5.00 | % | 4.93 | % | 10.34 | % | ||||||||||
The Corporation believes that in comparing financial institutions, investors desire to analyze tangible stockholders’ equity rather than stockholders’ equity, as follows:they discount the significance of goodwill and other intangible assets.
| (3) | The Corporation completed the acquisition of Red Oak Bank as of the close of business on May 20, 2005. The acquisition was accounted for as a purchase and the excess cost over the fair value of net assets acquired (“goodwill”) in the transaction was $14.7 million. The Corporation also recorded a core deposit intangible of $702,617 in connection with the acquisition. |
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
| (Dollars in Thousands, Except per Share Data) | |||||||||||||||||
| Net Income | $ | 3,898 | $ | 7,646 | $ | 7,622 | $ | 6,419 | $ | 8,003 | |||||||
| Average Stockholders’ equity | $ | 96,505 | $ | 85,772 | $ | 57,854 | $ | 51,959 | $ | 48,258 | |||||||
| Less: Average Goodwill and other intangible assets | 17,378 | 11,814 | 2,091 | 2,091 | 2,091 | ||||||||||||
| Average Tangible Stockholders’ Equity | $ | 79,127 | $ | 73,958 | $ | 55,763 | $ | 49,868 | $ | 46,167 | |||||||
| Return on Average Tangible stockholders’ Equity | 4.93 | % | 10.34 | % | 13.67 | % | 12.87 | % | 17.33 | % | |||||||
Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations
The purpose of this analysis is to provide the reader with information relevant to understanding and assessing Thethe Corporation’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.
Cautionary Statement Concerning Forward-Looking Statements
See Item 1 of this Annual Report on Form 10-K for information regarding forward lookingforward-looking statements.
Critical Accounting Policies and Estimates
The accounting and reporting policies followed by Center Bancorp, Inc. and its subsidiaries (the “Corporation”)the Corporation conform, in all material respects, to U.S. generally accepted accounting principles.GAAP. In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.
The Corporation’s accounting policies are fundamental to understanding Management’s Discussion and Analysis (“this MD&A”) of financial condition and results of operations.&A. The most significant accounting policies followed by the Corporation are presented in Note 1 of the Notes to Consolidated Financial Statements. The Corporation has identified its policies on the allowance for loan losses, other than temporary impairment of securities, income tax liabilities and goodwill and other identifiable intangible assets to be critical because management must make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes
Allowance for Loan Losses and Related Provision
The allowance for loan losses represents management’s estimate of probable creditloan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Corporation’s Consolidated Statements of Condition.
The evaluation of the adequacy of the allowance for loan losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.
The allowance for loan losses is established through a provision for loan losses charged to expense. Management believes that the current allowance for loan losses will be adequate to absorb loan losses on existing loans that may become uncollectible based on the evaluation of known and inherent risks in the loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect the borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. All of the factors considered in the analysis of the adequacy of the allowance for loan losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.
Other-Than-Temporary Impairment of Securities
Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. FASB ASC 320-10-65 (previously FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Investments”), clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. Impairment charges on certain investment securities of approximately $4.2 million were recognized in earnings during the year ended December 31, 2009, respectively. Of this amount, $3.4 million related to charges taken on two pooled trust preferred securities owned by the Corporation, $188,000 related to three private label collateralized mortgage obligations, $140,000 on its Lehman bond holding and $113,000 on an equity holding. Additionally, the Corporation recorded a $364,000 charge related to a court order for the liquidation of the Reserve Primary Fund. It is expected that 99 percent of Fund assets will be returned to the Corporation. The Corporation’s approach to determining whether or not other-than-temporary impairment exists for any of these investments was consistent with the accounting guidance in effect at that time. For the year ended December 31, 2009, the Corporation primarily relied upon the guidance in FASB ASC 320-10-65 (previously FAS 115-2 and 124-2), FASB ASC 820-10-65 (previously FASB FAS 157-4) and FASB ASC 310-10-35 (previously FAS 114). Additional information can be found in Note 4 of the Notes to Consolidated Financial Statements.
Impairment charges on certain investment securities of approximately $1.8 million were recognized during the year ended December 31, 2008. As a result of the bankruptcy of Lehman Brothers in September 2008, the Corporation incurred an impairment charge of $1.2 million in its investment securities portfolio during the third quarter of 2008 and an additional $100,000 during the fourth quarter of 2008. These charges were based on the Corporation’s expectation at December 31, 2008 of what the Corporation believed it would receive from the Lehman bankruptcy proceedings as opposed to an attempted sale into an illiquid market. Additionally, the Corporation recorded impairment charges of $461,000 relating to three equity security holdings. This determination was made after certain events during 2008 relating to the financial condition of the issuers caused concern that recovery of the carrying value would not occur in the near term. As such, it was deemed appropriate to mark each applicable security down to fair value. The Corporation’s approach to determining whether or not other-than-temporary impairment exists for any of these investments was consistent with the accounting guidance in effect at that time. For the year ended December 31, 2008, the Corporation primarily relied upon the guidance in FASB ASC 320-10-35 (previously FSP FAS 115-1 and 124-1), FASB ASC 820-10-35 (previously FASB FAS 157-3) and FASB ASC 325-40 (previously EITF 99-20). No impairment charges were recognized during the year ended December 31, 2007.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Corporation’s consolidated financial statements or tax returns.
Fluctuations in the actual outcome of these future tax consequences could impact the Corporation’s consolidated financial condition or results of operations. Notes 1 and 1211 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes.
Goodwill
The Corporation accounts for goodwill and other identifiable intangible assets in accordance withadopted the provisions of FASB ASC 350-10-05 (previously SFAS No. 142, “Goodwill and intangible assets.” SFAS No. 142 includes requirements to testOther Intangible Assets”), which requires that goodwill and indefinite livedbe reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but tested for impairment rather than amortize them.annually or more frequently if impairment indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2009 and 2008.
Fair Value of Investment Securities
In October 2008, the FASB issued FASB ASC 820-10-35 (previously FASB Staff Position 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active”), to clarify the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. FASB ASC 820-10-35 was applied to the Corporation’s December 31, 2008 consolidated financial statements. Changes in the Corporation’s methodology occurred for the quarter ended June 30, 2009 as new accounting guidance was released in April of 2009 with mandatory adoption required in the second quarter. The Corporation has testedrelied upon the goodwillguidance in FASB ASC 820-10-65 (previously FASB FAS 157-4) when determining fair value for the Corporation’s pooled trust preferred securities and at December 31, 2006, there was no goodwill impairment.
Introduction
The following introduction to Management’s Discussion and Analysis highlights the principal factors that contributed to the Corporation’s earnings performance in 2006.
The year of 20062009 was an extremelya challenging one for the banking industry and for the Corporation. The current global financial crisis and difficult economic climate has created challenges to financial institutions both domestically and abroad. Interest rates increased asin 2009 were reflective of significantly lower short-term interest rates in an effort to stimulate the economy. Competition for deposits in the Corporation’s marketplace remained intense while customers’ preference in seeking safety through full FDIC insured products and more liquidity became paramount in light of the financial crisis. Market conditions remained volatile during 2009, related to global instability in the markets in connection with the sub-prime crises. While we continue to see an improvement in balance sheet strength and core earnings performance, we are still concerned with the credit stability of the broader markets. As a result, of actions taken by the Federal Reserve which raised short-termkept overnight borrowing rates at zero to 25 basis points throughout the course of 2009. Short-term interest rates 100 basis points during 2006. Short term interest rates rose moreremained lower than longer term ones and market driven longer term interest rates remained mostly unchanged at relatively lower levels resulting in a flat yield curve and at times invertedan improved steepening of the yield curve. This resulted in a compressionan expansion of the Corporation’s net interest marginincome, which is the Corporation’s primary source of income. The Corporation has takenalso took action throughout the year to stem the decline in margin and to reduce further exposure to interest rates through a reduction in higher cost funding and non-core balances in the flat yield curve. Shoulddeposit mix and improvement in the yield curve remain flat or inverted, we expect this net interest margin compressionearning asset mix. The Corporation’s continued progress in growing and improving its balance sheet earning asset mix has helped to continue into 2007expand its spread and likely to hinder the growth of net interest income and net income. Further, as a result of the current adverse interest rate environment, the Corporation does not expect its earning assets to grow substantially in 2007.margin. We intend to continue to use a substantial portion of the proceeds of maturing investments to help fund new loan growth or repay borrowings.
The Corporation’s net income in 2006 declined to $3.92009 was $4.6 million or $0.29$0.30 per fully diluted common share, compared with net income of $7.6$5.8 million or $0.63$0.45 per fully diluted common share in 2005.2008. A substantial portion of our earnings in 2006 arose2009 and 2008 was from tax benefits.
Earnings for 2006, in addition to the interest rate compression,2009 were positively impacted by decreases in non-interest income, primarily from lower service charge fees and other feenet interest income and increased operating overheadspread expansion through both balance sheet improvements and a lower cost of funds as well as net securities gains as compared to net securities losses in 2008. These improvements were more than offset in part by a reduced effective tax rate.higher loan loss provisions as well as substantially higher FDIC insurance, higher other real estate owned expenses and higher pension expense. Other expense for the twelve-months ended December 31, 20062009 totaled $24.4$23.1 million, an increase of $2.15$3.6 million, or 9.66%, over18.4 percent, from the comparable period in 2005. twelve-months ended December 31, 2008 due principally to the above mentioned items.
Higher operating expenses during the twelve-monthtwelve month period resulted primarily from anincreases in salaries and employee benefits, FDIC insurance and OREO expense, offset in part by a decrease in net occupancy expenses, premises and equipment and marketing expenses. The Corporation previously announced a strategic outsourcing agreement with Fiserv to provide core account processing services, which is consistent with the Corporation’s other strategic initiatives to streamline operations, reduce operating overhead and allow the Corporation to focus on core competencies of customer service and product development. This coupled with previously initiated cost reduction plans are intended to improve operating efficiencies, business and technical operations. The core processing transition was consummated during the fourth quarter of 2009. Additionally, the consolidation of the Corporation’s branch office on 392 Springfield Avenue in Summit, New Jersey during the first quarter of 2009 into its new office on 545 Morris Avenue in Summit, New Jersey resulted in improved efficiency and increased customer service.
For the twelve months ended December 31, 2009, total salaries and benefits increased by $1.4 million, or 16.6 percent to $9.9 million. The increase in other general and administrative expenses as well as certain specific customer-related expenses. Other general and administrative expense was primarily due to a $755,000 benefit recognized in 2008 relating to the termination of two benefit plans coupled with increased $1.7 million, reflecting increases in professional consulting, compliance, audit fees, insurance and stationary and printing expense and certain increased expenses amounting to $294,000 related to customer third party services. Amortization of core deposit intangibles accounted for $120,000 of otherpension expense in 2009 due to both lower asset valuations and the current twelve month period and $75,000expected rate of return on the Corporation’s defined pension plan, which was frozen back in the comparable period in 2005. 2007.
The decreasedincreased tax rate resulted in part from income tax reductions, tax planning benefits and achanges in the Corporation’s business entity restructuring undertaken by the Corporationstructure during 2007 and into 2008 coupled with a higher proportion of taxable income versus tax-exempt income in 2006 with its subsidiary companies.
Total non-interest revenue decreasedincome increased as a percentage of total revenue, which is the sum of interest income and non-interest income, in 20062009 largely due to $491,000 in net securities gains as compared to $1.1 million in net securities losses on securities sold forin 2008. For the period. This revenue, exclusive of gains on securities sold (which decreased $2.9twelve months ended December 31, 2009, total other income increased $1.3 million during 2006), decreased $288,000 or 8.26 percent in 2006 as compared with 2005. The changethe twelve months ended December 31, 2008, from $2.6 million to $3.9 million. Excluding net securities gains and losses in the comparable periodrespective periods, the Corporation recorded total other income of $3.4 million in 2005the twelve months ended December 31, 2009, compared to $3.8 million in the twelve months ended December 31, 2008, representing a decrease of $335,000 or 8.9 percent. This decrease was driven primarily by the $163,000 declineattributable to a $180,000 decrease in service charges, commissions and a $177,000 decline in other income. The decline infees as well as lower other income, was attributable to a decline in letterresulting primarily from lower letters of credit fee income and loan fees.
Total assets at December 31, 2006,2009 were $1.051$1.197 billion, a decreasean increase of 5.6917.0 percent from assets of $1.1$1.023 billion at December 31, 2005.2008. The reductionincrease in assets in part, reflects the balance sheet restructuring announcedgrowth in our loan and investment securities portfolios as well as a higher level of uninvested excess cash, which reflects inflows in core savings deposits and Certificates of Deposit Account Registry Service (CDARS) Reciprocal deposits, as customers desire for safety and liquidity became paramount in light of the firstfinancial crisis. The Corporation has made a concerted effort to reduce non-core balances and, accordingly, its uninvested cash position was reduced by an average of $35 million during the fourth quarter of 2006. The Corporation utilized2009. Additionally, there has been a portion of the cash flows generated from the sales of securities to fund increased loans andconcerted effort to reduce short-term borrowings.
Loan growth continuedremained strong in 2006 and2009, spurred by business development efforts. Overall, the portfolio grew year over year by approximately $68.0$70.0 million on average or a 14.96an 11.2 percent increase from 2005. A strong2008. Strong demand for commercial real estate and residential housing marketloans prevailed throughout the year in ourthe Corporation’s market in New Jersey, despite the uncertain economic climate at both the state and national levels. We arelevels and market turmoil from the sub-prime markets. The Corporation is encouraged by the strength of loan demand and positive momentum gained this past year in growing that segment of earning-assets.earning assets. However, the Corporation continues to remain concerned with the credit stability of the broader markets due to the weakened economic climate.
Asset quality continues to remain high and credit culture conservative. During 2006,Even so, the Corporation did not experience any substantial problems within its loan portfolio. Despite the continued high qualitystability of the Corporation’s assets, theeconomy and credit markets remains uncertain and as such, has had an impact on certain credits within our portfolio. The Corporation made a provision of $56,525continued to make provisions to the allowance for loan losses.losses as efforts are made to stabilize credit quality issues. At December 31, 2006,2009, non-performing assets totaled $8.1 million or 0.68 percent of total assets, as compared with $13.9 million, or 1.03 percent, at September 30, 2009 and $4.7 million or 0.46 percent at December 31, 2008. The increase in non-performing loans from December 31, 2008 was primarily attributable to the addition of three large commercial loans and an increase in troubled debt restructurings. In March of 2009, one commercial real estate construction project of industrial warehouses was downgraded to non-accrual status, which was a participation loan with another New Jersey bank. In December of 2009, the Corporation took steps to terminate this participation agreement, as the participation ended on December 31, 2009. The Corporation has filed for the return of the outstanding principal and has reclassified this $5.1 million outstanding loan into other assets on the Corporation’s balance sheet. Other Real Estate Owned (OREO) decreased by $3.9 million due solely to the sale of a residential condominium construction project in Union County, New Jersey during the third quarter of 2009.
At December 31, 2009, the total allowance for loan and lease losses amounted to 0.90approximately $8.3 million, or 1.16 percent of total loans.
Deposit growth was mixedstrong in 20062009, reflective of customers’ desire for safety and liquidity and flight to quality in light of the changes in short-term interest rates. The growth in average deposits included a shift to more costly interest-bearing accounts, principally money market deposits.financial crisis. At December 31, 2006,2009, total deposits for the Corporation were $726.8$813.7 million. Non-interest-bearing core deposits, a low-costlow cost source of funding, continue to be a key-fundingkey funding source. At December 31, 2006,2009, this source of funding amounted to $136.4$130.5 million or 14.512.0 percent of total funding sources and 18.816.0 percent of total deposits.
Certificates of depositsdeposit $100,000 and greater decreasedincreased to 11.517.8 percent of total deposits at December 31, 20062009 from 22.015.2 percent one year earlier. The geographic expansionWith the current turmoil in the financial markets, some of the Corporation’s depositors have become sensitive to obtaining full FDIC insurance for their time deposits. To accommodate its customers, the Corporation into desirable markets (suchbegan offering Certificates of Deposit Account Registry Service (CDARS) in 2008. As a result of that offering and the temporary increase in insurance coverage by the FDIC to $250,000, the Corporation reported an increase of $44.3 million in certificates of deposit greater than $100,000 at December 31, 2009 as Morristown and Boonton in Morris County, New Jersey) over the past several years has contributedcompared to the growth in market share, as well as increased loan demand and growth in deposits. Additional expansion plans include a new branch location in Florham Park, New Jersey. This expansion is expected to enhance the Corporation’s ability to continue to grow and expand its product lines and to further build the value of the franchise.
Total stockholders’ equity decreased 1.9increased 25.5 percent over 2005from 2008 to $97.6$102.6 million, and represented 9.288.57 percent of total assets at year-end. Book value per common share (total common stockholders’ equity divided by the number of shares outstanding) decreasedincreased to $7.37$6.38 as compared with $7.41$6.29 a year ago, primarily as a result of the issuance of stock for$11 million capital raise from the acquisition of Red Oak Bank and the private placement of common stockCorporation’s rights offering consummated in 2005 coupled with the repurchase of shares by the Corporation during 2006, and change in other comprehensive income.October 2009. Tangible book value per common share (which excludes goodwill and other intangibles from common stockholders’ equity) decreasedincreased to $6.06$5.21 from $6.11$4.97 a year ago; see itemItem 6 of this Annual Report on Form 10-K for a reconciliation of tangible book value (which is a non-GAAP financial measure) to book value. Return on average stockholders’ equity for the year ended December 31, 20062009 was 4.044.87 percent compared to 8.917.03 percent for 2005.2008. This decrease in return was attributable to lower earnings in part additional shares issued in June 20052009 compared with 2008 coupled with higher average equity due primarily to both the capital raise from the rights offering and May 2005.capital received under the U.S. Treasury Capital Purchase Program. The Tier I Leverage capital ratio decreasedincreased to 8.647.80 percent of total assets at December 31, 2006,2009, as compared with 9.077.71 percent at December 31, 2005.
The Corporation’s performance is its strong capital base whichincludes the $11 million capital raise from the rights offering as well as the $10 million of capital received from the U.S. Treasury under the Capital Purchase Program. It also includes $5.2 million in subordinated debentures as of December 31, 2006 compared to $15.5 million at December 31, 2005. The Statutory Trust I subsidiary redeemed $10.3 million of floating rate capital trust pass through securities due2009 and December 18, 2031 on December 18, 2006. The most recent31, 2008. This issuance of $5.0 million in floating rate MMCapS(SM) Securities occurred on December 19, 2003. The Corporation has used the net proceeds of this issuance for working capital and other general corporate purposes, including capital contributions to the Corporation’s banking subsidiary to support its growth strategies. These securities presently are included as a component of Tier I capital for regulatory capital purposes. In accordance with FASB Interpretation No. 46, these securities are classified as subordinated debentures on the Consolidated Statements of Condition.
The Corporation’s risk-based capital ratios at December 31, 20062009 were 13.1811.51 percent for Tier I capital and 13.9212.46 percent for total risk-based capital. These ratios substantially exceed the regulatory minimum of 4 percent for Tier I risk-based capital and 8 percent for total risk-based capital under regulatory guidelines. Total Tier I capital decreasedincreased to approximately $88.0$99.3 million at December 31, 20062009 from $102.2$78.2 million at December 31, 2005.2008. The decreaseincrease in Tier 1I capital primarily reflects the Corporation’s redemption of $10.3 million in trust preferred securities by its subsidiary Center Bancorp, Inc. Statutory Trust I on December 18, 2006.
The Corporation announced an increase in its common stock buyback program on MarchSeptember 28, 2006,2007 and June 26, 2008, under which the Parent Corporation was authorized to purchase up to 671,8022,039,731 shares of Center Bancorp’s outstanding common stock. Under the program, repurchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. As of December 31, 20062009, the Corporation hashad repurchased 326,9081,386,863 shares under the program at an average cost of $11.95$11.44 per share.
The following sections discuss the Corporation’s Results of Operations, Asset and Liability Management, Liquidity and Capital Resource.
Results of Operations
Net income for the year ended December 31, 20062009 was $3,898,000$4,573,000 as compared to $7,646,000$5,842,000 earned in 20052008 and $7,622,000$3,856,000 earned in 2004. Net income decreased by 49.022007, a decrease of 21.7 percent while basicfrom 2008 to 2009. Basic and fully diluted earnings per common share decreased by 53.97 percent, for the year ended December 31, 2006. The decline in the Corporation’s earningswas $0.30 per share in 20062009 as compared to 2005 resulted from the earnings results depicted above and additional shares outstanding due to the acquisition of Red Oak Bank and issuance of common shares in a private placement on June 30, 2005. This compared to an increase of 0.31 percent in net income and decreases in basic and diluted earningswith $0.45 per share of 20.25 percentin 2008 and 19.23 percent, respectively, for the year ended December 31, 2005, as compared to the year ended December 31, 2004.$0.28 per share in 2007. All common share and per share information for all periods presented have been retroactively restated for common stock splits and common stock dividends distributed to common stockholders during the periods presented.
For the year ended December 31, 2009, the Corporation’s return on average stockholders’ equity (“ROE”) was 4.87 percent and its return on average assets (“ROA”) was 0.37 percent. The Corporation’s return on average tangible stockholders’ equity (“ROATE”) was 5.96 percent for 2009. The comparable ratios for the year ended December 31, 2006, as compared with 0.692008, were ROE of 7.03 percent, for 2005 and 0.81 percent for 2004, while the return on tangible average stockholders’ equity was 4.93 percent, 10.34ROA of 0.58 percent, and 13.67 percent, respectively.ROATE of 8.86 percent. See itemthe discussion and reconciliation of ROATE, which is a non-GAAP financial measure, under Item 6 of this Annual Report on Form 10-K for a reconciliation to return on average stockholders’ equity.
Earnings for the year reflect an increase in interest income due, in part, to higher interest rates in 2006 compared to 2005, higher yielding interest-earning assets and a reduction in income tax expense. This was substantially offset2009 were negatively impacted by an increase in interestother expense, associated with the rise in interest-bearing liabilities,due primarily to a reduction of the investment portfolio, a decrease in non-interest revenue, an increase in non-interest expense and thehigher provision for loan losses.
Net Interest Income
The following table presents the components of net interest income on a tax-equivalent basis for the past three years.
| | | | | | | | | | |||||||||||||||||||||||||||
| | | | | | | | | | |||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Amount | Increase (Decrease) from Prior Year | Percent Change | Amount | Increase (Decrease) from Prior Year | Percent Change | Amount | Increase (Decrease) from Prior Year | Percent Change | ||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||||||||||||||
| Investments | $ | 14,226 | $ | (179 | ) | (1.24 | ) | $ | 14,405 | $ | (4,850 | ) | (25.19 | ) | $ | 19,255 | $ | (3,215 | ) | (14.31 | ) | |||||||||||||||
| Loans, including fees | 36,751 | 641 | 1.78 | 36,110 | 2,583 | 7.70 | 33,527 | 1,528 | 4.78 | |||||||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | 0 | (113 | ) | (100.00 | ) | 113 | (491 | ) | (81.29 | ) | 604 | 57 | 10.42 | |||||||||||||||||||||||
| Restricted investment in bank stocks | 643 | 49 | 8.25 | 594 | 45 | 8.20 | 549 | 42 | 8.28 | |||||||||||||||||||||||||||
| Total interest income | 51,620 | 398 | 0.78 | 51,222 | (2,713 | ) | (5.03 | ) | 53,935 | (1,588 | ) | (2.86 | ) | |||||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||||||
| Deposits | 12,308 | (979 | ) | (7.37 | ) | 13,287 | (7,548 | ) | (36.23 | ) | 20,835 | 2,830 | 15.72 | |||||||||||||||||||||||
| Borrowings | 10,337 | (471 | ) | (4.36 | ) | 10,808 | 1,013 | 10.34 | 9,795 | (1,174 | ) | (10.70 | ) | |||||||||||||||||||||||
| Total interest expense | 22,645 | (1,450 | ) | (6.02 | ) | 24,095 | (6,535 | ) | (21.34 | ) | 30,630 | 1,656 | 5.72 | |||||||||||||||||||||||
| Net interest income on a fully tax-equivalent basis | 28,975 | 1,848 | 6.81 | 27,127 | 3,822 | 16.40 | 23,305 | (3,244 | ) | (12.22 | ) | |||||||||||||||||||||||||
| Tax-equivalent adjustment | (510 | ) | 818 | (61.60 | ) | (1,328 | ) | 478 | (26.47 | ) | (1,806 | ) | 392 | (17.83 | ) | |||||||||||||||||||||
| Net interest income | $ | 28,465 | $ | 2,666 | 10.33 | $ | 25,799 | $ | 4,300 | 20.00 | $ | 21,499 | $ | (2,852 | ) | (11.71 | ) | |||||||||||||||||||
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 tax-advantaged instruments.
Historically, the most significant component of the Corporation’s earnings has been net interest income, which is the difference between the interest earned inon the portfolio of earning-assetsearning assets (principally loans and investments) and the interest paid for deposits and borrowings, which support these assets. There were several factors that affected net interest income during 2006,2009, including the volume, pricing, mix and maturity of earninginterest-earning assets and interest-bearing liabilities and interest rate fluctuations.
2006 | 2005 | 2004 | ||||||||||||||||||||||||||
Amount | Increase (Decrease) From Prior Year | Percent Change | Amount | Increase (Decrease) From Prior Year | Percent Change | Amount | Increase (Decrease) From Prior Year | Percent Change | ||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||||||
| Investments | $ | 22,977 | $ | (4,713 | ) | (17.02 | ) | $ | 27,690 | $ | 4,206 | 17.91 | $ | 23,484 | $ | 1,260 | 5.67 | |||||||||||
| Loans, including fees | 31,999 | 6,670 | 26.33 | 25,329 | 6,800 | 36.70 | 18,529 | 3,398 | 22.46 | |||||||||||||||||||
| Federal funds sold and securities purchased under agreement to resell | 547 | 518 | 100.00 | 29 | 29 | 100.00 | — | — | 0.00 | |||||||||||||||||||
| Total interest income | 55,523 | 2,475 | 4.67 | 53,048 | 11,035 | 26.27 | 42,013 | 4,658 | 12.47 | |||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||
| Certificates $100 or more | 4,930 | 1,102 | 28.79 | 3,828 | 2,550 | 199.53 | 1,278 | 817 | 177.22 | |||||||||||||||||||
| Deposits | 13,075 | 5,304 | 68.25 | 7,771 | 1,634 | 26.63 | 6,137 | (575 | ) | (8.57 | ) | |||||||||||||||||
| Borrowings | 10,969 | (728 | ) | (6.22 | ) | 11,697 | 5,144 | 78.50 | 6,553 | 1,000 | 18.01 | |||||||||||||||||
| Total interest expense | 28,974 | 5,678 | 24.37 | 23,296 | 9,328 | 66.78 | 13,968 | 1,242 | 9.76 | |||||||||||||||||||
| Net interest income on a fully tax-equivalent basis | 26,549 | (3,203 | ) | (10.77 | ) | 29,752 | 1,707 | 6.09 | 28,045 | 3,416 | 13.87 | |||||||||||||||||
| Tax-equivalent adjustment | (2,198 | ) | 347 | (13.63 | ) | (2,545 | ) | (581 | ) | 29.58 | (1,964 | ) | (528 | ) | 36.77 | |||||||||||||
| Net interest income | $ | 24,351 | $ | (2,856 | ) | (10.50 | ) | $ | 27,207 | $ | 1,126 | 4.32 | $ | 26,081 | $ | 2,888 | 12.45 | |||||||||||
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 tax equivalent basis by adjusting tax-exempt income (primarily interest earned on various obligations of state and political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable issues, and then in accordance with the Corporation’s consolidated financial statements. Accordingly, 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.
Net interest income, on a fully tax-equivalent basis, for the year ended December 31, 2006 decreased $3.22009 increased $1.9 million, or 10.776.8 percent, to $29.0 million, from $29.8$27.1 million for 2005.2008. The Corporation’s net interest margin decreased 1411 basis points to 2.752.85 percent from 2.892.96 percent. From 20042007 to 2005,2008, net interest income on a tax equivalent basis increased by $1.7$3.8 million althoughand the net interest margin decreasedincreased by 3044 basis pointspoints. Our net interest margin has been adversely impacted by the high level of uninvested cash, which accumulated due to the strong deposit growth experienced throughout 2009.
The change in net interest income from 2005-20062008 to 2009 was primarily attributable in part to the changereduction in short-term interest rates that occurred in 2008 and have remained at historic low levels throughout 2009 coupled with a sustained steepening of the interest rate yield curve that impactedcurve. Steps were taken during 2009 to improve the Corporation’s net interest margin by continuing to lower rates in concert with the decline in market benchmark rates. However, in light of the financial institutionscrisis, the Corporation experienced significant growth during 2006.2009 in core savings deposits and CDARS Reciprocal deposits, as customers’ desire for safety and liquidity became paramount in light of the investment concerns. During the fourth quarter of 2009, a concerted effort was made to reduce non-core, single service deposits, and accordingly its uninvested cash position, which had an adverse impact on the Corporation’s net interest margin during 2009. However, during the twelve months ended December 31, 2006,2009, the Corporation’s net interest spread improved by 21 basis points as a 9152 basis point increasedecrease in the average yield on interest-earning assets was more than offset by a 73 basis point decrease in the average interest rates paid on total interest-bearing liabilities was offset only in part by a 59 basis point increase in the average yield on interest-earning assets from 5.16 percent in 2005 to 5.75 percent for 2006. The change in average yield on both interest-earning assets and interest-bearing liabilities reflected the increase in interest rates that occurred in 2006 as opposed to the lower interest rate environment in 2005 coupled with the impact of the sustained flatness of the yield curve.
For the year ended December 31, 2006,2009, average interest-earning assets increased by $102.4 million to $1.018 billion, as compared with the year ended December 31, 2008. The 2009 change in average interest-earning asset volume was primarily due to increased loan and investment volume, which is consistent with the balance sheet strategies of changing and improving the mix of average earning assets. Increased average loan volume in 2009 was funded primarily by deposit growth. Average interest-bearing liabilities increased by $193.9 million, due primarily to increases in core savings deposits and CDARS Reciprocal deposits.
For the year ended December 31, 2008, average interest-earning assets decreased by $62.2$8.8 million on average to $965.9$915.8 million, as compared with the year ended December 31, 2005.2007. The 20062008 change in average interest-earning asset volume was primarily due to decreased volumes of investment securities which is consistent with the balance sheet strategies implemented by management in the first quarter of 2006 and increased loans. Increased average loan
The factors underlying the year-to-year changes in net interest income are reflected in the tables presented belowon pages 36 and on page 24,38, each of which have been presented on a tax-equivalent basis (assuming a 34 percent tax rate). The table on page 2638 (Average Statements of Condition with Interest and Average Rates) shows the Corporation’s consolidated average balance of assets, liabilities and stockholders’ equity, the amount of income produced from interest-earning assets and the amount of expense incurred from interest-bearing liabilities, and net interest income as a percentage of average interest-earning assets.
Net Interest Margin
The following table quantifies the impact on net interest income (on a tax-equivalent basis) 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
| | | | | | | ||||||||||||||||||
| 2009/2008 Increase (Decrease) Due to Change in: | 2008/2007 Increase (Decrease) Due to Change in: | |||||||||||||||||||||||
| Average Volume | Average Rate | Net Change | Average Volume | Average Rate | Net Change | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Investment securities: | ||||||||||||||||||||||||
| Taxable | $ | 3,553 | $ | (1,355 | ) | $ | 2,198 | $ | (2,835 | ) | $ | (364 | ) | $ | (3,199 | ) | ||||||||
| Non-Taxable | (2,463 | ) | 86 | (2,377 | ) | (1,577 | ) | (74 | ) | (1,651 | ) | |||||||||||||
| Loans, net of unearned discount | 3,864 | (3,223 | ) | 641 | 4,807 | (2,224 | ) | 2,583 | ||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | (56 | ) | (57 | ) | (113 | ) | (294 | ) | (197 | ) | (491 | ) | ||||||||||||
| Restricted investment in bank stocks | 25 | 24 | 49 | 145 | (100 | ) | 45 | |||||||||||||||||
| Total interest-earning assets | 4,923 | (4,525 | ) | 398 | 246 | (2,959 | ) | (2,713 | ) | |||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market deposits | (545 | ) | (1,298 | ) | (1,843 | ) | 332 | (3,431 | ) | (3,099 | ) | |||||||||||||
| Savings deposits | 1,017 | 483 | 1,500 | (53 | ) | (14 | ) | (67 | ) | |||||||||||||||
| Time deposits | 3,648 | (3,050 | ) | 598 | (410 | ) | (2,170 | ) | (2,580 | ) | ||||||||||||||
| Other interest-bearing deposits | 204 | (1,438 | ) | (1,234 | ) | (1,039 | ) | (763 | ) | (1,802 | ) | |||||||||||||
| Borrowings and subordinated debentures | (463 | ) | (8 | ) | (471 | ) | 2,654 | (1,641 | ) | 1,013 | ||||||||||||||
| Total interest-bearing liabilities | 3,861 | (5,311 | ) | (1,450 | ) | 1,484 | (8,019 | ) | (6,535 | ) | ||||||||||||||
| Change in net interest income | $ | 1,062 | $ | 786 | $ | 1,848 | $ | (1,238 | ) | $ | 5,060 | $ | 3,822 | |||||||||||
2006/2005 Increase (Decrease) Due to Change in: | 2005/2004 Increase (Decrease) Due to Change in: | ||||||||||||||||||
Average Volume | Average Rate | Net Change | Average Volume | Average Rate | Net Change | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||
| Investment securities: | |||||||||||||||||||
| Taxable | $ | (5,070 | ) | $ | 1,733 | $ | (3,337 | ) | $ | 796 | $ | 1,235 | $ | 2,031 | |||||
| Non-Taxable | (2,160 | ) | 784 | (1,376 | ) | 2,152 | 23 | 2,175 | |||||||||||
| Loans, net of unearned discounts | 4,015 | 2,655 | 6,670 | 4,848 | 1,952 | 6,800 | |||||||||||||
| Federal funds sold and securities purchased under agreement to resell | 467 | 51 | 518 | 29 | — | 29 | |||||||||||||
| Total interest-earning assets | (2,748 | ) | 5,223 | 2,475 | 7,825 | 3,210 | 11,035 | ||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||
| Money market deposits | 875 | 1,546 | 2,421 | (23 | ) | 1,008 | 985 | ||||||||||||
| Savings deposits | (377 | ) | 574 | 197 | (278 | ) | 520 | 242 | |||||||||||
| Time deposits | 169 | 3,015 | 3,184 | 1,286 | 920 | 2,206 | |||||||||||||
| Other interest-bearing deposits | 4 | 600 | 604 | 353 | 398 | 751 | |||||||||||||
| Borrowings and subordinated debentures | (3,091 | ) | 2,363 | (728 | ) | 1,761 | 3,383 | 5,144 | |||||||||||
| Total interest-bearing liabilities | (2,420 | ) | 8,098 | 5,678 | 3,099 | 6,229 | 9,328 | ||||||||||||
| Change in net interest income | $ | (328 | ) | $ | (2,875 | ) | $ | (3,203 | ) | $ | 4,726 | $ | (3,019 | ) | $ | 1,707 | |||
Interest income on a fully tax-equivalent basis for the year ended December 31, 20062009 increased by approximately $2.5 million$398,000 or 4.670.8 percent as compared with the year ended December 31, 2005.2008. This increase was due primarily reflectsto an increase in balances of the Corporation’s loan and investment securities portfolios offset in part by a favorable changedecline in rates due to the mix of average-earning assets and improved yield on those components of earning assets.actions taken by the Federal Reserve to lower market interest rates. The Corporation’s loan portfolio increased on average $68.0$70.1 million to $522.3$692.6 million from $454.4$622.5 million in 2005,2008, primarily driven by growth in commercial loans and commercial real estate.
The loan portfolio represented approximately 54.168.0 percent of the Corporation’s interest earninginterest-earning assets (on average) during the twelve-months of 2006both 2009 and 44.2 percent in 2005.2008. Average investment securities volume decreasedincreased during 20062009 by $139.7$36.0 million compared to 2005, reflecting2008 as the repositioningCorporation has continued to reduce its concentration in tax-exempt securities and focused on purchases of the Corporation’s balance sheet in March of 2006.lower risk-based mortgage backed securities. The average yield on interest-earning assets increaseddecreased from 5.165.59 percent in 20052008 to 5.755.07 percent in 2006.2009. The volume of Federal Funds sold and securities purchased under agreement to resell
The increase in the volume of loans in 20062009 primarily reflected increases in commercial loans and mortgages and residential mortgagecommercial real estate loans. ThisThe increase in loans and the decreaseaverage volume on total interest-earning assets created an increase in investment securities were principally fundedinterest income of $4.9 million, as compared with a decline of $4.5 million attributable to rate decreases in most interest-earning assets.
Interest income (fully tax-equivalent) decreased by increased levels of high$2.7 million from 2007 to 2008 primarily due to a decline in yield interest-bearing money market deposits and time deposits.offset in part by an increase in loan volume. The increasedecrease in average yield on total interest-earning assets contributed $5.2created a $3.0 million reduction to the increase in interest income as compared with a $2.7contribution of $0.2 million reduction attributable to volume decreases in certain interest-earning assets.
The Federal Open Market Committee (“FOMC”) kept the Federal Funds target rate at zero to 0.25 percent throughout 2009. This action by $11.0 million from 2004the FOMC allowed the Corporation to 2005 primarily due to an increase in the volume of average interest-earning assets. The yield contributed $3.2 million and the loan and investment security volumes added $7.8 million to the increase in interest income for the period.
Interest expense for the year ended December 31, 20062009 was principally impacted by rate related factors. The rate related changes reflected increaseddecreased expense on most interest-bearing demand deposits, time deposits and short-term borrowings in 2006 offset in part by the2009 coupled with a decline in average volume of money market deposits and borrowings during 2006.2009. For the year ended December 31, 2006,2009, interest expense increased $5.7decreased $1.5 million or 24.46.0 percent as compared with 2005. Interest-bearing2008. During 2009, the Corporation continued to lower rates in concert with the decline in market benchmark rates. The result was an improvement in the Corporation’s cost of funds and net interest spread. Average interest-bearing liabilities in total decreased on average $62.8increased $193.9 million, primarily in CDARS Reciprocal deposits, our Max Plus savings depositsproduct and short-termin borrowings. The reduction in average volume offset $2.4 million of interest expense in 2006, while the increase in rates on interest-bearing liabilities contributed $8.1 million to the increase in interest expense for 2006.
For the year ended December 31, 2005,2008, interest expense increased $9.3decreased $6.5 million or 66.7821.3 percent as compared with 2004.2007. Total interest-bearing liabilities increased on average $123.4$15.4 million, primarily in timemoney market deposits interest-bearing demand and short-termin borrowings. The growth in average volume contributed $3.1 million to the change in cost, while the increase in rates on interest-bearing liabilities contributed $6.2 million to the increase in interest expense for 2005.
The Corporation’s net interest spread on a tax-equivalent basis (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) decreased 32increased 21 basis points to 2.172.79 percent in 20062009 from 2.492.58 percent for the year ended December 31, 2005.2008. The decreaseincrease in 20062009 reflected a compressionan expansion of spreads between yields earned on loans and investments and rates paid for supporting funds. During 2006,2009, spreads narrowedimproved due in part to monetary policy maintained by the FOMC keeping the Federal funds rate at zero to 0.25 percent throughout 2009 coupled with a steepening of the yield curve that occurred during 2009.
The net interest spread increased 66 basis points in 2008 as compared with 2007, primarily as a result of an expansion of spreads between yields earned on loans and investments and rates paid for supporting funds. During 2008, spreads improved due in part to the monetary policy promulgated by the Federal Reserve Open Market Committee increasingFOMC decreasing the target Federal Funds Rate 100funds rate 400 basis points from 4.25 percent at December 31, 20052007 to 5.250.25 percent at December 31, 20062008 coupled with the flattening and inversiona steepening of the yield curve that occurred during the twelve months ended December 31, 2006.
The cost of total average interest-bearing liabilities increaseddecreased to 3.582.28 percent, a changedecrease of 9173 basis points, for the year ended December 31, 2006,2009, from 2.673.01 percent for the year ended December 31, 20052008, which followed a changedecrease of 8190 basis points from 1.863.91 percent for the year ended December 31, 2004.
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) increaseddecreased to 5226 basis points, an increasea decrease of 1511 basis points from 20052008 to 2006.2009. Comparing 20052008 and 2004,2007, there was an increasea decrease of 1018 basis pointpoints to 37 basis points on average from 2755 basis points on average during the year ended December 31, 2004.
The following table, “Average Statements of Contents
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
| | | | | | | | | | |||||||||||||||||||||||||||
| | | | | | | | | | |||||||||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| (Tax-Equivalent Basis) | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | |||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Investment securities:(1) | ||||||||||||||||||||||||||||||||||||
| Taxable | $ | 289,414 | $ | 12,727 | 4.40 | % | $ | 211,185 | $ | 10,529 | 4.99 | % | $ | 267,884 | $ | 13,728 | 5.12 | % | ||||||||||||||||||
| Non-taxable | 25,677 | 1,499 | 5.84 | % | 67,890 | 3,876 | 5.71 | % | 95,501 | 5,527 | 5.79 | % | ||||||||||||||||||||||||
| Loans, net of unearned income:(2) | 692,562 | 36,751 | 5.31 | % | 622,533 | 36,110 | 5.80 | % | 541,297 | 33,527 | 6.19 | % | ||||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | — | — | — | 4,047 | 113 | 2.79 | % | 12,050 | 604 | 5.01 | % | |||||||||||||||||||||||||
| Restricted investment in bank stocks | 10,526 | 643 | 6.11 | % | 10,104 | 594 | 5.88 | % | 7,806 | 549 | 7.03 | % | ||||||||||||||||||||||||
| Total interest-earning assets | 1,018,179 | 51,620 | 5.07 | % | 915,759 | 51,222 | 5.59 | % | 924,538 | 53,935 | 5.83 | % | ||||||||||||||||||||||||
| Non-interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 128,156 | 16,063 | 18,586 | |||||||||||||||||||||||||||||||||
| Bank owned life insurance | 24,941 | 22,627 | 21,801 | |||||||||||||||||||||||||||||||||
| Intangible assets | 17,069 | 17,158 | 17,259 | |||||||||||||||||||||||||||||||||
| Other assets | 42,980 | 37,602 | 34,547 | |||||||||||||||||||||||||||||||||
| Allowance for loan losses | (6,916 | ) | (5,681 | ) | (5,002 | ) | ||||||||||||||||||||||||||||||
| Total non-interest earning assets | 206,230 | 87,769 | 87,191 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,224,409 | $ | 1,003,528 | $ | 1,011,729 | ||||||||||||||||||||||||||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Money market deposits | $ | 123,427 | $ | 1,635 | 1.32 | % | $ | 150,373 | $ | 3,478 | 2.31 | % | $ | 142,805 | $ | 6,577 | 4.61 | % | ||||||||||||||||||
| Savings deposits | 145,536 | 2,050 | 1.41 | % | 63,192 | 550 | 0.87 | % | 69,289 | 617 | 0.89 | % | ||||||||||||||||||||||||
| Time deposits | 319,639 | 6,850 | 2.14 | % | 178,761 | 6,252 | 3.50 | % | 187,860 | 8,832 | 4.70 | % | ||||||||||||||||||||||||
| Other interest-bearing deposits | 140,890 | 1,773 | 1.26 | % | 131,452 | 3,007 | 2.29 | % | 173,123 | 4,809 | 2.78 | % | ||||||||||||||||||||||||
| Short-term and long-term borrowings | 258,607 | 10,146 | 3.92 | % | 270,390 | 10,501 | 3.88 | % | 205,681 | 9,384 | 4.56 | % | ||||||||||||||||||||||||
| Subordinated debentures | 5,155 | 191 | 3.71 | % | 5,155 | 307 | 5.96 | % | 5,155 | 411 | 7.97 | % | ||||||||||||||||||||||||
| Total interest-bearing liabilities | 993,254 | 22,645 | 2.28 | % | 799,323 | 24,095 | 3.01 | % | 783,913 | 30,630 | 3.91 | % | ||||||||||||||||||||||||
| Non-interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||
| Demand deposits | 124,966 | 114,400 | 127,107 | |||||||||||||||||||||||||||||||||
| Other non-interest-bearing deposits | 333 | 368 | 385 | |||||||||||||||||||||||||||||||||
| Other liabilities | 12,003 | 6,314 | 5,979 | |||||||||||||||||||||||||||||||||
| Total non-interest-bearing liabilities | 137,302 | 121,082 | 133,471 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 93,853 | 83,123 | 94,345 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,224,409 | $ | 1,003,528 | $ | 1,011,729 | ||||||||||||||||||||||||||||||
| Net interest income (tax-equivalent basis) | 28,975 | 27,127 | 23,305 | |||||||||||||||||||||||||||||||||
| Net interest spread | 2.79 | % | 2.58 | % | 1.92 | % | ||||||||||||||||||||||||||||||
| Net interest income as percent of earning assets (margin) | 2.85 | % | 2.96 | % | 2.52 | % | ||||||||||||||||||||||||||||||
| Tax-equivalent adjustment(3) | (510 | ) | (1,328 | ) | (1,806 | ) | ||||||||||||||||||||||||||||||
| Net interest income | $ | 28,465 | $ | 25,799 | $ | 21,499 | ||||||||||||||||||||||||||||||
Years Ended December 31, | |||||||||||||||||||||||||
2006 | 2005 | 2004 | |||||||||||||||||||||||
(Tax-Equivalent Basis) | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | ||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||
| Investment securities:(1) | |||||||||||||||||||||||||
| Taxable | $ | 312,001 | $ | 15,752 | 5.05 | % | $ | 412,427 | $ | 19,199 | 4.66 | % | $ | 397,517 | $ | 17,393 | 4.38 | % | |||||||
| Non-taxable | 112,831 | 6,718 | 5.95 | % | 150,149 | 8,094 | 5.39 | % | 110,225 | 5,919 | 5.37 | % | |||||||||||||
| Loans, net of unearned income:(2) | 522,352 | 31,999 | 6.13 | % | 454,372 | 25,329 | 5.57 | % | 365,104 | 18,529 | 5.07 | % | |||||||||||||
| Federal funds sold and securities purchased under agreement to resell | 10,539 | 547 | 5.19 | % | 1,091 | 29 | 2.66 | % | — | — | 0.00 | % | |||||||||||||
| Restricted investment in bank stocks | 8,167 | 507 | 6.21 | % | 10,080 | 397 | 3.94 | % | 7,124 | 172 | 2.41 | % | |||||||||||||
| Total interest-earning assets | 965,890 | 55,523 | 5.75 | % | 1,028,119 | 53,048 | 5.16 | % | 879,970 | 42,013 | 4.77 | % | |||||||||||||
| Non-interest-earning assets: | |||||||||||||||||||||||||
| Cash and due from banks | 20,711 | 19,418 | 20,006 | ||||||||||||||||||||||
| Bank owned life insurance | 20,225 | 18,200 | 16,857 | ||||||||||||||||||||||
| Intangible assets | 17,378 | 11,814 | 2,091 | ||||||||||||||||||||||
| Other assets | 28,405 | 28,620 | 26,129 | ||||||||||||||||||||||
| Allowance for loan losses | (4,932 | ) | (4,534 | ) | (3,414 | ) | |||||||||||||||||||
| Total non-interest earning assets | 81,787 | 73,518 | 61,669 | ||||||||||||||||||||||
| Total assets | $ | 1,047,677 | $ | 1,101,637 | $ | 941,639 | |||||||||||||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||
| Money market deposits | $ | 126,502 | $ | 4,384 | 3.47 | % | $ | 92,875 | 1,963 | 2.11 | % | $ | 95,071 | 978 | 1.03 | % | |||||||||
| Savings deposits | 90,768 | 1,807 | 1.99 | % | 114,305 | 1,610 | 1.41 | % | 139,406 | 1,368 | 0.98 | % | |||||||||||||
| Time deposits | 232,803 | 9,950 | 4.27 | % | 227,249 | 6,766 | 2.98 | % | 181,094 | 4,560 | 2.52 | % | |||||||||||||
| Other interest-bearing deposits | 119,231 | 1,864 | 1.56 | % | 118,881 | 1,260 | 1.06 | % | 77,203 | 509 | .66 | % | |||||||||||||
| Short term borrowings and FHLB advances | 226,004 | 9,655 | 4.27 | % | 304,364 | 10,624 | 3.49 | % | 241,536 | 5,811 | 2.41 | % | |||||||||||||
| Subordinated debentures | 15,070 | 1,314 | 8.72 | % | 15,465 | 1,073 | 6.94 | % | 15,465 | 742 | 4.80 | % | |||||||||||||
| Total interest-bearing liabilities | 810,378 | 28,974 | 3.58 | % | 873,139 | 23,296 | 2.67 | % | 749,775 | 13,968 | 1.86 | % | |||||||||||||
| Non-interest-bearing liabilities: | |||||||||||||||||||||||||
| Demand deposits | 135,761 | 134,837 | 127,617 | ||||||||||||||||||||||
| Other non-interest-bearing deposits | 1,470 | 2,813 | 763 | ||||||||||||||||||||||
| Other liabilities | 3,563 | 5,076 | 5,630 | ||||||||||||||||||||||
| Total non-interest-bearing liabilities | 140,794 | 142,726 | 134,010 | ||||||||||||||||||||||
| Stockholders’ equity | 96,505 | 85,772 | 57,854 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 1,047,677 | $ | 1,101,637 | $ | 941,639 | |||||||||||||||||||
| Net interest income (tax-equivalent basis) | $ | 26,549 | $ | 29,752 | $ | 28,045 | |||||||||||||||||||
| Net interest spread | 2.17 | % | 2.49 | % | 2.91 | % | |||||||||||||||||||
| Net interest income as percent of earning assets (margin) | 2.75 | % | 2.89 | % | 3.19 | % | |||||||||||||||||||
| Tax-equivalent adjustment(3) | (2,198 | ) | (2,545 | ) | (1,964 | ) | |||||||||||||||||||
| Net interest income | $ | 24,351 | $ | 27,207 | $ | 26,081 | |||||||||||||||||||
| (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. |
Investment Portfolio
For the year ended December 31, 2006,2009, the average volume of investment securities decreasedincreased by $137.7$36.0 million to approximately $424.8$315.1 million or 44.030.9 percent of average earning assets.assets, from $279.1 million on average, or 30.5 percent of average earning assets, in the comparable period in 2008. At December 31, 2006,2009, the total investment portfolio amounted to $381.7$298.1 million, a decreasean increase of $136.0$55.4 million from December 31, 2005.2008. The decreaseincrease in the average volume of investment securities largely reflects a repositioning ofcontinues to maintain pace with the Corporation’s balance sheetrise in the first quarteroverall level of 2006 coupled with a continued declineearning assets. With the strong deposit growth experienced during 2009 and large buildup of liquidity, the Corporation began to prudently expand the size of its investment portfolio in the volume ofan effort to deploy excess cash flow from the portfolio that was reinvested into the portfolio.earning assets. At December 31, 2006,2009, the principal components of the investment portfolio are U.S. Treasury and U.S. Government Agency Obligations, Federal Agency Obligations including Mortgage-backedmortgage-backed securities, Obligations of U.S. states and political subdivision, corporate bonds and notes, and other debt and equity securities.
The Corporation’s investment portfolio also consists of overnight investments that were made in the Reserve Primary Fund (the “Fund”), a money market fund registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940. On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation could be effected for the protection of the Fund’s investors. Through December 31, 2009, the Corporation received five distributions from the Fund, totaling approximately 92 percent of its outstanding balance, leaving a remaining outstanding balance in the Fund of $2.943 million. On January 29, 2010, as part of the court ordered liquidation of the Fund, the Corporation received a sixth distribution or $2.446 million, bringing total distributions to date to approximately 99 percent. During the fourth quarter of 2009, the Corporation recorded a $364,000, or approximately 1 percent, other-than-temporary impairment charge to earnings relating to this court ordered liquidation of the Fund. The Corporation’s outstanding carrying balance in the Fund as of January 31, 2010 totaled $133,000.
The volume related factors during the twelve-monthtwelve month period ended December 31, 2006 decreased2009 increased investment revenue by $7.2$1.1 million, while rate related changes resulted in an increasea decrease in revenue of $2.5 million.$1.3 million from December 31, 2008. The tax-equivalent yield on investments increaseddecreased by 4465 basis points to 5.294.51 percent from a yield of 4.855.16 percent during the year ended December 31, 2005.2008. The 44 basis points increasereductions in the tax equivalent yield in investments was attributable to a higher interest rate environment in 2006, coupled with a change in mixinvestment portfolio, primarily in the portfoliotax-exempt sector, were made to higher yielding tax-free securities. There was some portfolio extension where risk is relatively minimal withinreduce exposure to these particular sectors of the portfolio resulting in wider spreads, specifically with tax-free municipal securities addedwhile continuing to the portfolio during 2006. This favorably impacted the portfolio yield, as compared with 2005.provide cash flow for loan funding and forecasted liability outflows. The yield on the portfolio benefited fromdeclined compared to 2008 due primarily to sales as well as the impact ofthat the higherlower interest rate environment had on purchases made to replacehigher yielding securities whichthat had either matured, were prepaid, or were called.
During the first quarter of 2009, the Corporation recorded a $140,000 other-than-temporary impairment charge on its Lehman Brothers bond holding. Through June 30, 2009, other-than-temporary impairment charges taken on this bond amounted to $1,440,000. As part of the Corporation’s tax strategies, management elected to sell the Lehman bond holding during the third quarter of 2009.
The Corporation owns two pooled trust preferred securities (“Pooled TRUPS”), which consists of securities issued by financial institutions and insurance companies and the Corporation holds the mezzanine tranche of such securities. Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches. One of the Pooled TRUPS has incurred its third interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded a $1.1 million other-than-temporary impairment charge for the three months ended December 31, 2009 and $2.5 million for the twelve months ended December 31, 2009, which represents 78.7 percent of the par amount of $3.1 million. The new cost basis for this security has been written down to $665,000. The other Pooled TRUP incurred its first interruption of cash flow payments in part invested back into the portfolio.fourth quarter of 2009. Management determined that an other-than-temporary impairment exists on this security as well and recorded a $1.0 million charge during the fourth quarter of 2009, which represents 32.3 percent of the par amount of $3.0 million. The new cost basis for this security has been written down to $2.0 million.
The Corporation owns three variable rate private label collateralized mortgage obligations (CMOs), which were also evaluated for impairment. Management had applied aggressive default rates to identify if any credit impairment exists, as these bonds were downgraded to below investment grade. These bonds are currently paying with no interruption of cash flow. As such, management determined that an other-than-temporary impairment charge exists and recorded a $188,000 writedown to the bonds, which represents 3.4 percent of the par amount of $5.6 million. The new cost basis for these securities has been written down to $5.4 million.
During 2009, the Corporation recorded $113,000 of other-than-temporary impairment charges relating to one equity holding in bank stocks. Due to the deterioration in that bank’s financial condition and that near term prospects in market value recovery appear remote, management determined that the expectation to recover its cost is not temporary. As such, this equity was written down to fair market value at the time of evaluation, which was December 31, 2009.
Securities available-for-sale isare 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. During 2006, approximately $188.0 million in securities were sold fromThe Corporation continues to reposition the Corporation’s available-for-sale portfolio, a portion of which funded increases in loan volume and a portion of which reduced the volume of short-term borrowings related to the repositioning of the Corporation’s balance sheet in March of 2006. At that time the Corporation sold from its available for saleinvestment portfolio as part of the restructuring, $86.3 million of available-for-sale securities, which were yielding less than 4 percent. The sale resultedan overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in an after-tax charge of approximately $2.4 million. The proceeds from the sale of securities were utilized to reduce the Corporation’s short-term borrowings and wholesale funding sources by $85.0 million. As a result of this de-leveraging, short-term borrowings were reduced to $98.5 million at March 23, 2006. The Corporation’s sales from its available-for-sale portfolio were made in the ordinary course of business. A sale of $517,000 from the Corporation’s held-to-maturity portfolio was made with a gain on sale in the amount of $29,404 in anticipation of an imminent call of the security permissible in accordance with FASB No. 115.
At December 31, 20062009, the net unrealized loss carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to a net unrealized loss of $2.5$8.4 million as compared with a net unrealized loss of $4.4$6.5 million at December 31, 2005,2008, resulting from an increasechanges in market conditions and interest rates fostered byat period-end December 31, 2009. As a result of the Federal Open Market Committee’s actionsinactive condition of the markets amidst the financial crisis, the Corporation elected to continue to increase the Federal Funds target rate to mitigate inflation risk.treat certain securities under a permissible alternate valuation approach at December 31, 2009 and 2008. For additional information regarding the Corporation’s investment portfolio, see Note 74 and Note 18 of the Notes to the Consolidated Financial Statements.
The following table illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for investment securities at December 31, 2006,2009, on a contractual maturity basis.
| | | | | | |||||||||||||||
| U.S. Treasury & Agency Securities | Federal Agency Obligations | Obligations of U.S. States & Political Subdivisions | Other Debt and Equity Securities | Total | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Due in 1 year or less | ||||||||||||||||||||
| Amortized Cost | $ | 150 | $ | — | $ | 979 | $ | 723 | $ | 1,852 | ||||||||||
| Market Value | 150 | — | 981 | 726 | 1,857 | |||||||||||||||
| Weighted Average Yield | 0.16 | % | — | 2.69 | % | 3.48 | % | 2.79 | % | |||||||||||
| Due after one year through five years | ||||||||||||||||||||
| Amortized Cost | $ | — | $ | — | $ | 4,103 | $ | 3,000 | $ | 7,103 | ||||||||||
| Market Value | — | — | 4,132 | 2,100 | 6,232 | |||||||||||||||
| Weighted Average Yield | — | — | 3.57 | % | 2.80 | % | 3.24 | % | ||||||||||||
| Due after five years through ten years | ||||||||||||||||||||
| Amortized Cost | $ | 1,939 | $ | 23,506 | $ | 4,253 | $ | 22,957 | $ | 52,655 | ||||||||||
| Market Value | 1,939 | 23,226 | 4,255 | 21,930 | 51,350 | |||||||||||||||
| Weighted Average Yield | 3.72 | % | 3.13 | % | 3.89 | % | 4.70 | % | 3.90 | % | ||||||||||
| Due after ten years | ||||||||||||||||||||
| Amortized Cost | $ | — | $ | 193,134 | $ | 10,353 | $ | 46,977 | $ | 250,464 | ||||||||||
| Market Value | — | 191,359 | 9,913 | 37,413 | 238,685 | |||||||||||||||
| Weighted Average Yield | — | 4.06 | % | 4.10 | % | 4.57 | % | 4.16 | % | |||||||||||
| Total | ||||||||||||||||||||
| Amortized Cost | $ | 2,089 | $ | 216,640 | $ | 19,688 | $ | 73,657 | $ | 312,074 | ||||||||||
| Market Value | 2,089 | 214,585 | 19,281 | 62,169 | 298,124 | |||||||||||||||
| Weighted Average Yield | 3.46 | % | 3.96 | % | 3.87 | % | 4.53 | % | 4.08 | % | ||||||||||
U.S. Treasury & Agency Securities | Federal Agency Obligations | Obligations of U.S. States & Political Subdivisions | Other debt and equity Securities | Total | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Due in 1 year or less | ||||||||||||||||
| Amortized Cost | $ | 0 | 1,008 | $ | 669 | $ | 39,706 | $ | 41,383 | |||||||
| Market Value | 0 | 1,005 | 689 | $ | 40,009 | 41,703 | ||||||||||
| Weighted Average Yield | 0 | % | 3.77 | % | 7.42 | % | 4.28 | % | 4.32 | % | ||||||
| Due after one year through five years | ||||||||||||||||
| Amortized Cost | $ | 100 | 11,675 | $ | 11,170 | $ | 19,159 | $ | 42,104 | |||||||
| Market Value | 100 | 11,351 | 11,042 | 19,568 | 42,061 | |||||||||||
| Weighted Average Yield | 4.76 | % | 4.09 | % | 3.59 | % | 5.51 | % | 4.60 | % | ||||||
| Due after five years through ten years | ||||||||||||||||
| Amortized Cost | $ | 49 | 47,512 | $ | 33,350 | $ | 4,030 | $ | 84,941 | |||||||
| Market Value | 50 | 46,270 | 32,962 | 3,954 | 83,236 | |||||||||||
| Weighted Average Yield | 0.00 | % | 4.66 | % | 3.63 | % | 5.26 | % | 4.29 | % | ||||||
| Due after ten years | ||||||||||||||||
| Amortized Cost | $ | 462 | 77,204 | $ | 41,793 | $ | 98,038 | $ | 217,497 | |||||||
| Market Value | 479 | 74,564 | 41,945 | 97,515 | 214,503 | |||||||||||
| Weighted Average Yield | 7.14 | % | 4.29 | % | 4.11 | % | 5.78 | % | 4.94 | % | ||||||
| Total | ||||||||||||||||
| Amortized Cost | $ | 611 | 137,399 | $ | 86,982 | $ | 160,933 | $ | 385,925 | |||||||
| Market Value | 629 | 133,190 | 86,638 | 161,046 | 381,503 | |||||||||||
| Weighted Average Yield | 6.70 | % | 4.40 | % | 3.88 | % | 5.34 | % | 4.69 | % | ||||||
For information regarding the carrying value of the investment portfolio, see Note 74 and Note 18 of the Notes to the Consolidated Financial Statements.
The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting investment grade and conform to the Corporation’s investment policy guidelines. There were no municipal securities of any single issuer exceeding 10 percent of stockholders’ equity at the end of 2006.
Equity securities included in other debt and equity securities do not have a contractual maturity and are included in the Due after ten years maturity in the table above.
The following table sets forth the bookcarrying value of the Corporation’s investment securities, both available for sale and held to maturity, as of December 31 for each of the last three years.
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Securities Available-for-Sale: | ||||||||||||
| U.S. Treasury & Agency Securities | $ | 2,089 | $ | 100 | $ | 101 | ||||||
| Federal Agency Obligations | 214,585 | 82,797 | 108,991 | |||||||||
| Obligations of U.S. States and political subdivisions | 19,281 | 52,094 | 83,337 | |||||||||
| Trust Preferred Securities | 26,715 | 31,771 | 30,468 | |||||||||
| Other debt securities | 29,921 | 59,362 | 83,478 | |||||||||
| Other equity securities | 5,533 | 16,590 | 7,819 | |||||||||
| Total Investment Securities Available-for-Sale | $ | 298,124 | $ | 242,714 | $ | 314,194 | ||||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| U.S. Treasury & Agency Securities | $ | 611 | $ | 1,710 | $ | 5,772 | ||||
| Federal Agency Obligations | 137,399 | 248,834 | 280,931 | |||||||
| Obligations of U.S. States and political subdivisions | 86,982 | 105,578 | 102,216 | |||||||
| Other debt securities | 140,285 | 153,597 | 31,514 | |||||||
| Other equity securities | 20,648 | 14,752 | 150,162 | |||||||
| Total Book Value | $ | 385,925 | $ | 524,471 | $ | 570,595 | ||||
For other information regarding the Corporation’s investment securities portfolio, see Note 74 and Note 18 of the Notes to the Consolidated Financial Statements.
Loan Portfolio
Lending is one of the Corporation’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. The composition of the Corporation’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 via repeat customer business and entry, through branching, into new markets.
At December 31, 20062009, total loans amounted to $550.4$715.5 million, an increase of 8.815.8 percent or $44.6$39.3 million as compared to December 31, 2005.2008. The $0.6 million or 1.8 percent increase in interest income on loans for the twelve months ended December 31, 2006,2009 was the result of the increase in volume during 2009, offset in part by a lower interest ratesrate environment as compared with 2005, lessened to some extent by the competitive rate pricing structure maintained by2008. Even though the Corporation continues to attract new loans and further by thebe challenged with heightened competition for lending relationships that exists in the Corporation’s market.within its market, strong growth has been achieved through successful lending sales efforts to build on continued customer relationships while striving to maintain asset quality and underwriting standards. The Federal Reserve Open Market Committee increasedFOMC decreased the target Federal Funds Rate fourrate seven times during 20062008 to 5.25zero to 0.25 percent from 4.25 percentand the target rate has remained at December 31, 2005. Loan growth during the year ended December 31, 2005 occurred primarily in residential mortgage loans and in the commercial loan portfolio. The Red Oak Bank merger in May 2005 contributed to the mix and net growth of the loan portfolio. Growth also resulted from the Corporation’s business development efforts, heightened visibility of its products and aggressive marketing campaigns on its home equity, 7/1 adjustable rate residential mortgage and 10-year residential mortgage loan products.
Total average loan volume increased $68.0$70.1 million or 14.9611.2 percent in 2006,2009, while the portfolio yield increaseddecreased by 5649 basis points as compared with 2005.2008. The increased total average loan volume was due primarily to increased repeat customer activity and new lending relationships and new markets.relationships. The volume related factors during the period contributed increased revenue of $4.0$3.9 million, while the rate related changes contributed $2.7decreased revenue by $3.2 million. Total average loan volume increased to $522.4$692.6 million with a net interest yield of 6.135.31 percent, as compared to $454.4$622.5 million with a yield of 5.575.80 percent for the year ended December 31, 2005.2008. The Corporation seeks to create growth in commercial lending by offering products and competitive pricing and by capitalizing on the positive trendsnew and existing relationships in its market area. 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 following table presents information regarding the components of the Corporation’s loan portfolio on the dates indicated.
| | | | | | |||||||||||||||
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Real estate – residential mortgage | $ | 191,199 | $ | 240,885 | $ | 266,251 | $ | 269,486 | $ | 261,028 | ||||||||||
| Real estate – commercial mortgage | 405,903 | 358,394 | 219,356 | 206,044 | 164,841 | |||||||||||||||
| Commercial and industrial | 117,912 | 75,415 | 65,493 | 74,179 | 79,006 | |||||||||||||||
| Installment | 439 | 1,509 | 569 | 705 | 951 | |||||||||||||||
| Total loans | 715,453 | 676,203 | 551,669 | 550,414 | 505,826 | |||||||||||||||
| Less: | ||||||||||||||||||||
| Allowance for loan losses | 8,275 | 6,254 | 5,163 | 4,960 | 4,937 | |||||||||||||||
| Net loans | $ | 707,178 | $ | 669,949 | $ | 546,506 | $ | 545,454 | $ | 500,889 | ||||||||||
Years Ended December 31, | ||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Commercial | $ | 280,223 | $ | 243,847 | $ | 150,281 | $ | 127,307 | $ | 104,481 | ||||||
| Real estate residential mortgage | 269,486 | 261,028 | 221,893 | 214,482 | 119,674 | |||||||||||
| Installment | 705 | 951 | 5,130 | 7,736 | 4,896 | |||||||||||
| Total | 550,414 | 505,826 | 377,304 | 349,525 | 229,051 | |||||||||||
| Less: | ||||||||||||||||
| Allowance for loan losses | 4,960 | 4,937 | 3,781 | 3,002 | 2,498 | |||||||||||
| Net total | $ | 545,454 | $ | 500,889 | $ | 373,523 | $ | 346,523 | $ | 226,553 | ||||||
Included in the loan balances above are net deferred loan costs of $391,000, $572,000 and $579,000 at December 31, 2009, 2008 and 2007, respectively.
Over the past five years, demand for the Bank’s commercial loan,and commercial real estate and real estate mortgageloan products has improved.
The increase in commercial loan and commercial real estate loans in 20062009 was a result of the expansion of the Corporation’s markets, increased lending limits, morecustomer base, aggressive business development and marketing programs coupled with positive market trends Consumerfor the Corporation. While certain sectors of the markets, such as consumer real estate products, lagged as the market conditions changed andduring most of 2008, the refinancing boom which startedCorporation experienced an increase in 2005 peaked and startedits lending sales efforts during 2009 as it continued to wane in 2006.
Average commercial loans, which include commercial real estate and construction, increased to $260.7$476.1 million or by approximately $54.3$110.6 million or 26.330.1 percent in 2006 as2009 compared with 2005.2008. The Corporation seeks to create growth in the commercial lending sector by offering competitive products and competitive pricing and by capitalizing on the positive trendsnew relationships in its market area. Over the last several years, the expansion of the Bank’s marketplace and increased capital base havehas aided in this growth. Products are offered to meet the financial requirements of the Corporation’s clients. It is thean 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.such as operators of private educational facilities, for example. 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.
Average commercial real estate loans, which amounted to $129.0$269.3 million in 2006,2009, increased $22.0$58.0 million or 20.627.5 percent as compared with average commercial real estate loans of $107.0$211.3 million in 20052008 (which reflected a 19.454.5 percent increase over 2004)2007). The Corporation’s long-term mortgage portfolio includes both residential and commercial financing. Growth during the past two years largely reflected brisk activity in new lending activity and mortgage financing. The interest rates on a portion of the Corporation’s commercial mortgages adjust to changes in indices such as the 5-year5 and 10-year Treasury Notes, and the Federal Home Loan Bank of New York 5-year5 and 10-year advance rate. Interest rate changes usually occur at each five yearfive-year anniversary of the loan.
The average volume of residential mortgage loans, including home equity loans, in 2006 remained stable2009 declined $39.8 million or 15.6 percent as compared to 2005, the stability in average volume2008. During 2009, residential loan growth was attributable toaffected by the slowdown in the housing market, in 2006 and to some extent the sale of loans carrying more unusual terms and conditions that the Corporation did not want to retain in its portfolio, such as forty year terms and interest only loans. During 2002 through 2004, residential loan growth was affected bybrisk refinancing activity into fixed rate loans due principally to the current historic low rate environment and competition among lenders and lower interest rates. In 2004 and 2005, this was mitigated to some extent, by the promotion of variable interest rate products including a 10-year amortizing mortgage, 7/1 adjustable rate mortgage and an aggressive promotional campaign for home equity lines of credit, which resulted in increased volumes in these categories of loans. The momentum of 2004 carried over into the beginning of 2005 as more variable rate products were promoted, including 3/1 and 5/1 adjustable rate mortgages.lenders. Fixed rate residential and home equity loans becamehave recently become a popular choice foramong homeowners, during 2005either through refinancing or new loans, as interest rates began to rise and consumers lookedwish to lock in historically low fixed rates. However, that enthusiasm diminished in 2006, contributing to some of the slowing of growth.
Average construction loans and other temporary mortgage financing increased from 20052008 to 20062009 by $30.5$1.4 million to $56.1$49.4 million. The average volume of such loans increaseddecreased by $16.3$6.3 million from 20042007 to 2005.2008. The change in construction and other temporary mortgage lending has beenin 2009 was generated by thea slowdown in market activity of the Corporation’s customers, several of whom engage 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 itproject. It is contemplated that the loans will be repaid by cash flows derived from sales within the project or, where appropriate, conversion to permanent financing.
Loans to individuals include personal loans, student loans, and home improvement loans, as well as financing for automobiles and other vehicles. Such loans averaged $927,000$773,000 in 2006, as2009, compared with $1.5$973,000 in 2008 and $881,000 million in 2005 and $5.6 million in 2004.2007. The decrease in loans to individuals during 2006 and 20052009 was due in part to decreases in volumes of new personal loans (single-pay), and in part by declines in volumes of new automobile loans, as a result of aggressive marketing campaigns by automobile manufacturers.
Home equity loans, inclusive of home equity lines, as well as traditional secondary mortgage loans, have become popular with consumers due to their tax advantages over other forms of consumer borrowing.
At December 31, 2006,2009, the Corporation had total lendingloan commitments outstanding of $146.7$167.5 million, of which approximately 46.463.7 percent were for commercial loans, commercial real estate loans and construction loans.
The maturities of loans at December 31, 20062009 are listed below.
| | | | | ||||||||||||
| At December 31, 2009, Maturing | ||||||||||||||||
| In One Year or Less | After One Year through Five Years | After Five Years | Total | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Construction loans | $ | 25,918 | $ | 14,028 | $ | 7,000 | $ | 46,946 | ||||||||
| Commercial real estate loans | 47,241 | 168,302 | 143,414 | 358,957 | ||||||||||||
| Commercial loans | 59,927 | 48,644 | 9,341 | 117,912 | ||||||||||||
| All other loans | 42,013 | 24,488 | 125,137 | 191,638 | ||||||||||||
| Total | $ | 175,099 | $ | 255,462 | $ | 284,892 | $ | 715,453 | ||||||||
| Loans with: | ||||||||||||||||
| Fixed rates | $ | 47,258 | $ | 98,739 | $ | 258,834 | $ | 404,831 | ||||||||
| Variable rates | 127,841 | 156,723 | 26,058 | 310,622 | ||||||||||||
| Total | $ | 175,099 | $ | 255,462 | $ | 284,892 | $ | 715,453 | ||||||||
At December 31, 2006, Maturing | |||||||||||||
In One Year Or Less | After One Year Through Five Years | After Five Years | Total | ||||||||||
| (Dollars in Thousands) | |||||||||||||
| Construction loans | $ | 58,437 | $ | 11,894 | $ | — | $ | 70,331 | |||||
| Commercial real estate loans | 13,837 | 101,440 | 31,718 | 146,995 | |||||||||
| Commercial loans | 34,094 | 20,986 | 7,817 | 62,897 | |||||||||
| All other loans | 6,647 | 69,150 | 194,394 | 270,191 | |||||||||
| Total | $ | 113,015 | $ | 203,470 | $ | 233,929 | $ | 550,414 | |||||
| Loans with: | |||||||||||||
| Fixed rates | 22,032 | 37,662 | 178,233 | 237,927 | |||||||||
| Variable rates | 90,983 | 165,808 | 55,696 | 312,487 | |||||||||
| Total | $ | 113,015 | $ | 203,470 | $ | 233,929 | $ | 550,414 | |||||
For additional information regarding loans, see Note 85 of the Notes to the Consolidated Financial Statements.
Allowance for Loan Losses and Related Provision
The purpose of the allowance for loan losses (“allowance”) is to absorb the impact of probable 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 Corporation’s allowance was increased by the amount of Red Oak Bank’s allowance at the time of the acquisition of that Bank in May 2005, which increase amounted to $1.2 million. 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 and peer group statistics are also reviewed. At year-end 2006,2009, the level of the allowance was $4,960,000$8,275,000 as compared to a level of $4,937,000$6,254,000 at December 31, 2005.2008. The Corporation made loan loss provisions of $57,000$3,261,000 in 20062009 compared with none$1,561,000 in 20052008 and provisions of $752,000$350,000 in 2004.2007. The level of the allowance during the respective annual periods of 20062009 and 20052008 reflects the change in average volume, credit quality within the loan portfolio, the level of charge-offs, loan volume recorded during the periods and the Corporation’s focus on the changing composition of the commercial and residential real estate loan portfolios.
At December 31, 2006,2009, the allowance for loan losses amounted to 0.901.16 percent of total loans. In management’s view, the level of the allowance at December 31, 2006,2009 is adequate to cover losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.
Although management uses the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term change. Various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to increase the allowance based on their analysis of information available to them at the time of their examination. Furthermore, the majority of the Corporation’s loans are secured by real estate in the State of New Jersey. Future adjustments to the allowance may be necessary due to economic factors impacting New Jersey real estate and further deterioration of the economic climate as
well as operating, regulatory and other conditions beyond the Corporation’s control. The allowance for loan losses as a percentage of total loans amounted to 0.901.16 percent, 0.980.92 percent and 1.000.94 percent at December 31, 2006, 20052009, 2008 and 2004,2007, respectively.
Net charge-offs were $34,000$1,240,000 in 20062009, $470,000 in 2008 and $54,000$147,000 in 2005. Net recoveries were $27,000 in 2004.2007. During 2006,2009, the Corporation experienced an increase in the volume of charge-offs in the installment loan portfolios compared to 20052008, principally related to charge-offs taken on four commercial and 2004 levels, attributablecommercial real estate credits during the fourth quarter of 2009 totaling $1.1 million, coupled with a $900,000 charge-off in connection with a $5.1 million commercial real estate construction project of industrial warehouses, which was placed in non-accrual status during the first quarter of 2009. As previously disclosed, during the fourth quarter of 2009, the Corporation took steps to terminate a participation agreement with another New Jersey bank, as the participation ended on December 31, 2009. The other bank objected to the increase in interest ratesCorporation’s interpretation of the agreement and subsequent actions. Accordingly, the Corporation filed suit for the return of the outstanding principal and reclassified the outstanding loan into other assets on its balance sheet. As such, a higher level$900,000 recovery was recorded during the fourth quarter of personal bankruptcies.
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 (recoveries) for the past five years.
| | | | | | |||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Average loans outstanding | $ | 692,562 | $ | 622,533 | $ | 541,297 | $ | 522,352 | $ | 454,372 | ||||||||||
| Total loans at end of period | $ | 715,453 | $ | 676,203 | $ | 551,669 | $ | 550,414 | $ | 505,826 | ||||||||||
| Analysis of the Allowance for Loan Losses | ||||||||||||||||||||
| Balance at the beginning of year | $ | 6,254 | $ | 5,163 | $ | 4,960 | $ | 4,937 | $ | 3,781 | ||||||||||
| Charge-offs: | ||||||||||||||||||||
| Commercial | 2,122 | 50 | 45 | — | 49 | |||||||||||||||
| Residential | 4 | 414 | 80 | — | — | |||||||||||||||
| Installment loans | 26 | 35 | 31 | 79 | 33 | |||||||||||||||
| Total charge-offs | 2,152 | 499 | 156 | 79 | 82 | |||||||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial | 902 | 10 | 2 | 19 | — | |||||||||||||||
| Residential | 4 | — | — | — | — | |||||||||||||||
| Installment loans | 6 | 19 | 7 | 26 | 28 | |||||||||||||||
| Total recoveries | 912 | 29 | 9 | 45 | 28 | |||||||||||||||
| Net charge-offs (recoveries) | 1,240 | 470 | 147 | 34 | 54 | |||||||||||||||
| Addition of Red Oak Bank’s allowance | — | — | — | — | 1,210 | |||||||||||||||
| Provision for loan losses | 3,261 | 1,561 | 350 | 57 | — | |||||||||||||||
| Balance at end of year | $ | 8,275 | $ | 6,254 | $ | 5,163 | $ | 4,960 | $ | 4,937 | ||||||||||
| Ratio of net charge-offs during the year to average loans outstanding during the year | 0.18 | % | 0.08 | % | 0.03 | % | 0.01 | % | 0.01 | % | ||||||||||
| Allowance for loan losses as a percentage of total loans at end of year | 1.16 | % | 0.92 | % | 0.94 | % | 0.90 | % | 0.98 | % | ||||||||||
Years Ended December 31, | ||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Average loans outstanding | $ | 522,352 | $ | 454,372 | $ | 365,104 | $ | 276,457 | $ | 222,819 | ||||||
| Total loans at end of period | $ | 550,414 | $ | 505,826 | $ | 377,304 | $ | 349,525 | $ | 229,051 | ||||||
| Analysis of the Allowance for Loan Losses | ||||||||||||||||
| Balance at the beginning of year | $ | 4,937 | $ | 3,781 | $ | 3,002 | $ | 2,498 | $ | 2,191 | ||||||
| Charge-offs: | ||||||||||||||||
| Commercial | — | 49 | — | — | 48 | |||||||||||
| Installment loans | 79 | 33 | 11 | 39 | 69 | |||||||||||
| Total charge-offs | 79 | 82 | 11 | 39 | 117 | |||||||||||
| Recoveries: | ||||||||||||||||
| Commercial | 19 | — | — | — | 48 | |||||||||||
| Installment loans | 26 | 28 | 38 | 21 | 16 | |||||||||||
| Total recoveries | 45 | 28 | 38 | 21 | 64 | |||||||||||
| Net charge-offs (recoveries) | 34 | 54 | (27 | ) | 18 | 53 | ||||||||||
| Addition of Red Oak Bank’s allowance – May 20, 2005 | — | 1,210 | — | — | — | |||||||||||
| Provision for loan losses | 57 | — | 752 | 522 | 360 | |||||||||||
| Balance at end of year | $ | 4,960 | $ | 4,937 | $ | 3,781 | $ | 3,002 | $ | 2,498 | ||||||
| Ratio of net charge-offs during the year to average loans outstanding during the year | 0.01 | % | 0.01 | % | N/M | 0.01 | % | 0.02 | % | |||||||
| Allowance for loan losses as a percentage of total loans at end of year | 0.90 | % | 0.98 | % | 1.00 | % | 0.86 | % | 1.09 | % | ||||||
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 in the table 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 32 of this report.
| | | | | | | | | ||||||||||||||||||||||||||||
| Commercial | Real Estate Residential Mortgage | Installment | Unallocated | |||||||||||||||||||||||||||||||||
| Amount of Allowance | Loans to Total Loans % | Amount of Allowance | Loans to Total Loans % | Amount of Allowance | Loans to Total Loans % | Amount of Allowance | Total | |||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
| 2009 | $ | 6,532 | 73.2 | $ | 1,312 | 26.6 | $ | 56 | 0.2 | $ | 375 | $ | 8,275 | |||||||||||||||||||||||
| 2008 | 5,473 | 64.2 | 651 | 35.6 | 60 | 0.2 | 70 | 6,254 | ||||||||||||||||||||||||||||
| 2007 | 4,167 | 51.6 | 727 | 48.3 | 49 | 0.1 | 220 | 5,163 | ||||||||||||||||||||||||||||
| 2006 | 3,972 | 50.9 | 707 | 49.0 | 45 | 0.1 | 236 | 4,960 | ||||||||||||||||||||||||||||
| 2005 | 3,453 | 48.2 | 594 | 51.6 | 55 | 0.2 | 835 | 4,937 | ||||||||||||||||||||||||||||
Commercial | Real Estate Mortgage | Installment | Unallocated | ||||||||||||||||||||||
Amount of Allowance | Loans to Total Loans % | Amount of Allowance | Loans to Total Loans % | Amount of Allowance | Loans to Total Loans % | Amount of Allowance | Total | ||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||
| 2006 | $ | 3,972 | 50.9 | $ | 707 | 49.0 | $ | 45 | 0.1 | $ | 236 | $ | 4,960 | ||||||||||||
| 2005 | $ | 3,453 | 48.2 | $ | 594 | 51.6 | $ | 55 | 0.2 | $ | 835 | $ | 4,937 | ||||||||||||
| 2004 | $ | 2,561 | 39.8 | $ | 744 | 58.8 | $ | 8 | 1.4 | $ | 468 | $ | 3,781 | ||||||||||||
| 2003 | $ | 1,763 | 38.6 | $ | 986 | 59.2 | $ | 80 | 2.2 | $ | 173 | $ | 3,002 | ||||||||||||
| 2002 | $ | 1,846 | 45.8 | $ | 494 | 52.3 | $ | 46 | 1.9 | $ | 112 | $ | 2,498 | ||||||||||||
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
It is generally the Corporation’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected.collected and a satisfactory period of ongoing repayment exists. Accruing loans past due 90 days or more are generally well secured and in the process of collection.
Non-Performing and Past Due Loans and OREO
Non-performing loans include non-accrual loans, accruing loans which are contractually past due 90 days or more and troubled debt restructuring.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, 2006, 2005, 2004, 2003 and 2002 the Corporation did not have any other real estate owned (OREO) or troubled debt restructuring.
The following table sets forth, as of the dates indicated, the amount of the Corporation’s non-accrual loans, accruing loans past due 90 days or more, troubled debt restructurings and other real estate owned. The Corporation had no restructured loans on any of such dates.owned (“OREO”).
| | | | | | |||||||||||||||
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Non-accrual loans | $ | 7,092 | $ | 541 | $ | 3,907 | $ | 475 | $ | 387 | ||||||||||
| Accruing loans past due 90 days or more | 39 | 139 | — | 225 | 179 | |||||||||||||||
| Troubled debt restructuring | 966 | 93 | — | — | — | |||||||||||||||
| Total non-performing loans | 8,097 | 773 | 3,907 | 700 | 566 | |||||||||||||||
| OREO | — | 3,949 | 501 | — | — | |||||||||||||||
| Total non-performing assets | $ | 8,097 | $ | 4,722 | $ | 4,408 | $ | 700 | $ | 566 | ||||||||||
At December 31, | |||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
| (Dollars in Thousands) | |||||||||||||||||
| Non-accrual loans | $ | 475 | $ | 387 | $ | — | $ | 26 | $ | 229 | |||||||
| Troubled debt restructuring | — | — | — | — | — | ||||||||||||
| Other real estate owned | — | — | — | — | — | ||||||||||||
| Total non-performing assets | $ | 475 | $ | 387 | $ | — | $ | 26 | $ | 229 | |||||||
| Accruing loans past due 90 days or more | 225 | 179 | — | — | — | ||||||||||||
| Total non-performing assets and accruing loans past due 90 days or more | $ | 700 | $ | 566 | $ | — | $ | 26 | $ | 229 | |||||||
The increase in non-accrual loans of $88,000$6.6 million in 20062009 from 2008 was primarily relatedattributable to the addition of three large commercial credits. In March of 2009, one commercial real estate construction project of industrial warehouses was downgraded to non-accrual status. The loan was a participation loan with another New Jersey bank. In December of 2009, the Corporation took steps to terminate this participation agreement, as the participation ended on December 31, 2009. The Corporation filed suit for the return of the outstanding principal and has reclassified this $5.1 million outstanding loan into other assets on the Corporation’s balance sheet. The $966,000 carried as a troubled debt restructuring represents the total modified amount required to be paid by two business loansdifferent one-to-four family residential developers and three consumer loans. All of thesefour one-to-four family residential mortgage homeowners. The repayment terms are restructured to meet each borrower’s financial circumstances. These loans are secured by real estate secured. In 2005 non-accrual loans increased $387,000 from none reported at December 31, 2004, which were comprisedlocated in New Jersey.
The components of four commercial loans and two residential loans. The accruing loans past due 90 days or more at December 31, 2006 consisted of one real estate secured commercial loan.
| | | | | | |||||||||||||||
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Commercial | $ | — | $ | — | $ | — | $ | 225 | $ | 179 | ||||||||||
| Residential | 39 | 139 | — | — | — | |||||||||||||||
| Installment | — | — | — | — | — | |||||||||||||||
| Total accruing loans 90 days or more past due | $ | 39 | $ | 139 | $ | — | $ | 225 | $ | 179 | ||||||||||
December 31, | ||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Commercial | $ | 225 | $ | 179 | $ | — | $ | — | $ | — | ||||||
| Installment | — | — | — | — | — | |||||||||||
| Total accruing loans 90 days or more past due | $ | 225 | $ | 179 | $ | — | $ | — | $ | — | ||||||
Other known “potential problem loans” (as defined by SEC regulations) as of December 31, 20062009 have been identified and internally risk rated as other assets especially mentioned or substandard. Such loans amounted to $2,089,000, $4,923,000$20,048,000, $9,401,000 and $207,000$5,776,000 at December 31, 2006, 20052009, 2008 and 20042007, respectively. The increase at December 31, 2009 reflects continued deterioration in the quality of certain loans. The risk rating of assets is a dynamic environment wherein through on-going examination certain assets may be downgraded or upgraded as circumstances warrant. The Corporation’s construction portfolio experienced a decline in potential problem loans from December 31, 2008 to December 31, 2009 as the addition of one new relationship of $3.6 million was offset by the removal of another relationship amounting to $4.7 million. The Corporation’s commercial portfolio experienced an increase in potential problem loans with the addition of six lending relationships while shedding two for a net increase of $12.7 million in this segment. This increase was mitigated somewhat by principal payments made on many of these accounts. All such loans are currently performing. The Corporation has no foreign loans.
During the first quarter of 2010, the Corporation reevaluated several loans which resulted in the downgrade of two lending relationships totaling $4.8 million into risk rating categories associated with “potential problem loans” that had not previously been characterized as such by the Corporation. Further, $725,000 was placed on non-accrual status.
At December 31, 2006,2009, 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 tables or description above.
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 mortgagereal estate loans, which are well secured and in the process of foreclosure.
With respect to concentrations of credit within the Corporation’s loan portfolio of credits at December 31, 2006, $39.12009, $22.6 million of the commercial loan portfolio or 14.05.2 percent of $280.2$430.3 million, represented outstanding working capital loans to various real estate developers. All but $14.2$8.0 million of these loans are secured by mortgages on land and on buildings under construction.
For additional information regarding risk elements in the Corporation’s loan portfolio, see Note 85 of the Notes to Consolidated Financial Statements.
Other 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, 2006.2009.
| | | | | | | ||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | % Change | 2008 | 2007 | % Change | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Service charges, commissions and fees | $ | 1,835 | $ | 2,015 | (8.93 | ) | $ | 2,015 | $ | 1,824 | 10.47 | |||||||||||||
| Annuity & insurance commissions | 126 | 112 | 12.50 | 112 | 298 | (62.42 | ) | |||||||||||||||||
| Bank-owned life insurance | 1,156 | 1,203 | (3.91 | ) | 1,203 | 893 | 34.71 | |||||||||||||||||
| Net securities gains (losses) | 491 | (1,106 | ) | 144.39 | (1,106 | ) | 900 | (222.89 | ) | |||||||||||||||
| Other | 298 | 420 | (29.05 | ) | 420 | 457 | (8.10 | ) | ||||||||||||||||
| Total other income | $ | 3,906 | $ | 2,644 | 47.73 | $ | 2,644 | $ | 4,372 | (39.52 | ) | |||||||||||||
Years Ended December 31, | |||||||||||||||||||
2006 | 2005 | % Change | 2005 | 2004 | % Change | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| Service charges, commissions and fees | $ | 1,759 | $ | 1,922 | (8.48 | ) | $ | 1,922 | $ | 1,948 | (1.33 | ) | |||||||
| Other income | 454 | 631 | (28.05 | ) | 631 | 499 | 26.45 | ||||||||||||
| Annuity & insurance commissions | 205 | 193 | 6.22 | 193 | 59 | 227.12 | |||||||||||||
| Bank Owned Life Insurance | 780 | 740 | 5.41 | 740 | 734 | .82 | |||||||||||||
| Net (losses) gains on securities sold | (2,565 | ) | 350 | (832.86 | ) | 350 | 148 | 136.49 | |||||||||||
| Total other non-interest income | $ | 633 | $ | 3,836 | (83.50 | ) | $ | 3,836 | $ | 3,388 | 13.22 | ||||||||
For the year ended December 31, 2006,2009, total other non-interest income exclusiveincreased $1.3 million compared to 2008, primarily as a result of net securities gains compared to net securities losses onin 2008. Excluding net securities sold, reflectsgains and losses in the respective periods, the Corporation recorded other income of $3.4 million in the year ended December 31, 2009, compared to $3.8 million in 2008, a decrease of $288,000 or 8.26 percent from 2005. Total other income, including gains (losses) on securities sold decreased $3.2 million for the twelve-months of 2006 compared with the comparable period in 2005. The declines stem8.9 percent. This decrease was primarily from the securities losses during the first quarter of 2006 and declinesattributable to a $180,000 decrease in service charges, commissions and fess coupled with declines in other income. The $163,000 or 8.48% decline in service charges is related tofees as well as lower overdraft fees and service charge income on deposit accounts as compared with 2005. The $177,000 decline in other income, is relatedresulting primarily from lower letters of credit fee income and title insurance income. Additionally, in 2009 and 2008, the Corporation recognized $136,000 and $230,000, respectively, in tax-free proceeds in excess of contract value on the Corporation’s bank-owned life insurance due to decreased commissions and related one-time commissions on check book charges in 2005.
During 2006,2009, the Corporation recorded net securities gains of $491,000 compared to net securities losses of $2.6$1.1 million in 2008 and net gains of $900,000 recorded in 2007. In 2009, total other-than-temporary impairment charges of $4.2 million were more than offset by net gains on securities sold fromof $4.7 million. These impairment charges consisted of $3.4 million relating to two pooled trust preferred securities, $364,000 relating to the available-for-saleCorporation’s investment portfolio comparedin the Reserve Primary Fund, $188,000 relating to three variable rate private label CMOs, a $140,000 charge relating to the Corporation’s Lehman Brothers bond and a $113,000 writedown relating to one equity holding in bank stocks. In 2008, total other-than-temporary impairment charges of $1.8 million were partially offset by net gains on securities sold of $350,000$655,000. During 2008, the Corporation recorded a $1.3 million other-than-temporary impairment charge related to its Lehman Brothers corporate bond and $148,000 recorded$461,000 of writedowns related to three equity holdings in 2005 and 2004. The sales in 2006 were made as part of the Corporation’s decision to reposition its statement of condition to improve the Corporation’s inertest rate profile; the proceeds from the sales were used principally to reduce borrowings.bank stocks. In 2005 and in 20042009, the sales of securities were made in the normal course of business and proceeds were primarily reinvested into the loan
and investment portfolios. In 2008 and 2007, the sales of securities were made in the normal course of business and proceeds were primarily reinvested into the loan portfolios.
Other Expense
Total non-interestother expense includes salarysalaries and employee benefits, net occupancy expense, and premises and equipment expense, professional and consulting expense, stationery and printing expense, marketing and advertising expense, computer expense and other operating expense. Other operating expense includes such expenses as telephone, computer, and insurance, legal, professional and consulting, audit, bank correspondent fees and the amortization of core deposit intangibles. Such expense in 2005 includes a partial year of the operating expenses of Red Oak Bank since its acquisition on May 20, 2005. These expenses include the costs related to one branch acquired which was also Red Oak Bank’s administration building; other increased costs resulting from the acquisition include occupancy and bank premises expense, increased audit, marketing and advertising expenses and increased computer related expenses related to the integration of Red Oak Bank into Union Center National Bank.
The following table presents the principal categories of non-interestother expense for each of the years in the three-year period ended December 31, 2006.2009.
| | | | | | | ||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | % Change | 2008 | 2007 | % Change | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Salaries and employee benefits | $ | 9,915 | $ | 8,505 | 16.58 | $ | 8,505 | $ | 11,436 | (25.63 | ) | |||||||||||||
| Occupancy, net | 2,536 | 3,279 | (22.66 | ) | 3,279 | 2,843 | 15.34 | |||||||||||||||||
| Premises and equipment | 1,263 | 1,436 | (12.05 | ) | 1,436 | 1,777 | (19.19 | ) | ||||||||||||||||
| FDIC Insurance | 2,055 | 217 | 847.00 | 217 | 86 | 152.33 | ||||||||||||||||||
| Professional and consulting | 811 | 703 | 15.36 | 703 | 2,139 | (67.13 | ) | |||||||||||||||||
| Stationery and printing | 339 | 397 | (14.61 | ) | 397 | 465 | (14.62 | ) | ||||||||||||||||
| Marketing and advertising | 366 | 637 | (42.54 | ) | 637 | 603 | 5.64 | |||||||||||||||||
| Computer expense | 964 | 834 | 15.59 | 834 | 614 | 35.83 | ||||||||||||||||||
| OREO Expense, net | 1,438 | 31 | 4538.71 | 31 | 110 | (71.82 | ) | |||||||||||||||||
| Other | 3,370 | 3,434 | (1.86 | ) | 3,434 | 4,525 | (24.11 | ) | ||||||||||||||||
| Total other expense | $ | 23,057 | $ | 19,473 | 18.40 | $ | 19,473 | $ | 24,598 | (20.84 | ) | |||||||||||||
Year Ended December 31, | |||||||||||||||||||
2006 | 2005 | % Change | 2005 | 2004 | % Change | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| Salaries and employee benefits | $ | 12,290 | $ | 12,108 | 1.50 | $ | 12,108 | $ | 10,140 | 19.41 | |||||||||
| Occupancy, net | 2,309 | 2,165 | 6.65 | 2,165 | 1,943 | 11.43 | |||||||||||||
| Premises and equipment | 1,940 | 1,990 | (2.51 | ) | 1,990 | 1,852 | 7.45 | ||||||||||||
| Stationery and printing | 692 | 628 | 10.19 | 628 | 539 | 16.51 | |||||||||||||
| Marketing and advertising | 731 | 644 | 13.51 | 644 | 529 | 21.74 | |||||||||||||
| Computer | 741 | 594 | 24.75 | 594 | 451 | 31.71 | |||||||||||||
| Other | 5,655 | 4,084 | 38.47 | 4,084 | 4,017 | 1.67 | |||||||||||||
| Total other non-interest expense | $ | 24,358 | $ | 22,213 | 9.66 | $ | 22,213 | $ | 19,471 | 14.08 | |||||||||
Total non-interestother expense increased $2.15$3.6 million, or 9.6618.4 percent, in 20062009 from 20052008 as compared with an increasea decrease of $2.7$5.1 million, or 14.0820.8 percent, from 20042007 to 2005.2008. The level of operating expenses during 20062009 increased in three major expense categories, with the largest increases occurring in FDIC insurance, up $1.8 million, OREO expenses, up $1.4 million and salaries and employee benefits, up $1.4 million. Total other expense decreased in 2008 from 2007 across several expense categories, althoughwith the principal increase ($1.7 million) involved general operating expenses.
On October 25, 2007, the Corporation announced that the Boards of Directors of the Corporation and Beacon Trust Company mutually agreed to terminate their Agreement and Plan of Merger dated as of March 15, 2007. Concurrently, the parties agreed to a dismissal of litigation commenced by Beacon Trust Company in October 2007 to compel consummation of the merger. During the fourth quarter of 2007, the Corporation recognized merger-related expenses, reflecting the cost of the transaction from the outset of negotiations, in an amount of approximately $600,000.
Prudent management of operating expenses has and will continue to be a key objective of management in an effort to improve earnings performance. The Corporation’s ratio of other expenses to average assets increaseddecreased to 2.321.88 percent in 20062009 compared to 2.021.94 percent in 20052008 and 2.072.43 percent in 2004.
Salaries and employee benefits increased $182,000$1.4 million or 1.5016.6 percent in 20062009 compared to 20052008 and increased $2.0decreased $2.9 million or 19.41%25.6 percent from 20042007 to 2005.2008. The increase from 2004 to 2005in 2009 was primarily attributable to a $755,000 benefit recognized in 2008 relating to the increase in staffing levelstermination of two benefit plans. During the third quarter of 2008, the Corporation recognized a $272,000 benefit relating to 202 full time equivalent from 192 at December 31, 2004. The increase reflects staffing positions which were previously vacantthe lump-sum payment and filledtermination of the directors retirement plan. During the fourth quarter of 2008, the Corporation recognized a $483,000 benefit relating to a lump-sum payment and termination of a benefit equalization plan. These benefits represented the difference between the actuarial present value of the lump-sum payment and the retentionaccrued liability previously recorded on the Corporation’s statement of eight full-time equivalent employeescondition. Additionally, pension plan expense increased $514,000 in 2009 from 2008 due to both lower asset valuations and a lower expected rate of return on the Corporation’s defined pension plan, which was frozen back in 2007. On August 9, 2007, the Corporation announced that as
part of its ongoing effort to reduce operating expense, it had frozen its defined benefit pension plan and that it redesigned its 401(k) savings plan, effective September 30, 2007. The changes were consistent with cost reduction strategies and a shift in the acquisitionfocus of Red Oak Bank.future savings of retirement benefits toward the more predictable cost structure of a 401(k) plan and away from the legacy costs of a defined benefit pension plan. The changes included stopping the accrual of future benefits in the Corporation’s defined benefit pension plan, and fully preserving all retirement benefits that employees have earned as of September 30, 2007; and redesigning the Corporation’s 401(k) plan by granting current pension plan participants an annual company-funded matching contribution of as much as 6 percent of their pay, which is an increase from the existing 3 percent match. As a result, the Corporation recorded a creditone-time pre-tax benefit related to these pension plan changes of $478,000 to benefits expense representing a reductionapproximately $1.2 million in the Corporation’s obligation related to certain long-termthird quarter of 2007, reflecting the curtailment of the defined benefit plans. plan. For the twelve months ended December 31, 2007, the plan changes resulted in retirement-related expense savings of $1.2 million.
Salaries and employee benefits accounted for 50.4643.0 percent of total other non-interest expense in 2006,2009, as compared to 54.5143.7 percent and 52.0846.5 percent in 20052008 and 2004,2007, respectively.
In 2009, the Corporation announced a strategic outsourcing agreement with Fiserv to 214 full-time equivalent employees at December 31, 2006 comparedprovide core account processing services, which is consistent with the Corporation’s other strategic initiatives to 202 full-time equivalent employees at December 31, 2005streamline operations, reduce operating overhead and 192 at December 31, 2004.allow the Corporation to focus on core competencies of customer service and product development. The increasecore processing transition was consummated during the fourth quarter of 2009. In 2008, the Corporation announced a series of strategic outsourcing agreements to aid in 2006 primarily reflects the increased staffing forrealization of its goal to reduce operating overhead and shrink the new Boonton/ Mountain Lakes officeinfrastructure of the Corporation. The cost reduction plans resulted in Octoberthe reduction of 2006. The increase in 2006 also reflects increases in compensation cost attributable to stock options accounted for under FASB 125(R) which amounted to $159,831 in 2006, offset with reductions in overtime and incentive bonus expense. The increase in 2005 reflects staffingworkforce by 12 staff positions, which were previously vacant and eight full-time equivalent employees retainedin turn resulted in a one-time pre-tax charge of $145,000 in the acquisitionsecond quarter of Red Oak Bank.
Occupancy and bank premises and equipment expense for the year ended December 31, 2006 increased $94,000,2009 decreased $916,000, or 2.2619.4 percent, over 2005.from 2008. The increasedecrease in occupancy and bank premises and equipment expense in 2006 is2009 was due primarily attributable to higherlower operating costs (utilities, rent, real estate taxes, general repair and maintenance) of the Corporation’s expanded facilities, due in part to branch closures and consolidations coupled with higher equipment maintenance and repair and depreciation expenses.a $200,000 charge taken during the fourth quarter of 2008 relating to the termination of the Corporation’s lease obligation to build a branch in Cranford, New Jersey. The increase in such expenses of $360,000,$95,000, or 9.492.1 percent, in 20052008 over 20042007 was alsoprimarily attributable to the $200,000 lease termination charge.
In May 2009, the FDIC adopted a final special assessment rule that assessed the banking industry 5 basis points on total assets less Tier I capital. The Corporation was required to accrue the charge during the second quarter of 2009, which amounted to approximately $630,000, even though the FDIC collected the fee at the end of the third quarter when the regular quarterly assessments for the second were collected. Additionally, in December 2008, the FDIC adopted a final rule increasing the risk-based assessment rates beginning in the first quarter of 2009. As a result of these changes coupled with the one-time assessment credits recognized in 2008, FDIC insurance expense increased $1.8 million for 2009 compared to 2008.
Professional and consulting expense for 2009 increased $108,000 due to higher legal costs in 2009, principally related to the rights offering capital raise and the TARP Capital Purchase Program. Expenses decreased in 2008 from 2007 primarily due to $960,000 of expanded bank facilities, includingprofessional and consulting expenses in 2007 associated with the additiontermination of Red Oak Bank.
Stationery and printing expenses for the year increased $64,000,2009 decreased $58,000, or 10.214.6 percent, compared to 2005,2008, due primarily to better cost containment measures relating to stationery and printing materials. The decrease in part related to increased business activity and growth experienced from 2005, primarily the merger with Red Oak Bank. These costs increased $89,000such expenses of $68,000 or 16.5114.6 percent in 20052008 from 2004, again reflecting primarily2007 reflected improved cost containment in the merger with Red Oak Bank and increased business activity.
Marketing and advertising expenses for the year ended December 31, 2006 increased $87,000,2009 decreased $271,000, or 13.5142.5 percent, overfrom the comparable twelve-month period in 2005.2008. The increasedecrease in 2006 was primarily related to increased advertising and promotional expense incurred with marketing new deposit accounts and the opening of the new Boonton/Mountain Lakes office. These expenses, which increased $115,000 or 21.74 percent in 2005 when2009 compared with 2004 levels, reflected the acquisition of Red Oak Bank in 2005.
was primarily due to Table of Contents
Computer expense increased $130,000 during both 20062009 compared to 2008 and 2005 were relatedincreased $220,000 in 2008 compared to increases2007, due primarily to fees paid to the Corporation’s outsourced information technology service provider. This previously announced strategic outsourcing agreement has significantly improved operating efficiencies and reduced overhead, primarily in expanded customer service platformssalaries and relatedbenefits.
OREO expense for software and service fees2009 increased by $1.4 million over 2008 due primarily to vendor providersthe recognition of a $926,000 writedown coupled with expanded business activity.
Other expenses increasedexpense decreased in 2009 by approximately $1.6 million$64,000 or 38.471.9 percent compared to 2005. Higher operating expenses during the twelve-month period resulted2008. Other expense decreased in 2008 by $1.1 million, or 24.1 percent, compared to 2007. This decrease in 2008 was primarily from an increase in other general and administrative expenses as well as certain specific customer-related expenses. The increase included several extraordinary one-time expenses which accounted for 29 percent of the increase in such expense in 2006; $294,000 related to customer corporate analysis charges and $162,000 related to the write-off of expenses incurred due to the abandonmentcharge-off of the previous Cranford branch site under development. Other expense items which increased during the period included increasesBeacon Trust transaction in professional consulting, compliance, audit fees and insurance expense for the twelve-month period.2007. Amortization of core deposit intangibles accounted for $120,000$82,000 and $95,000 of other expense infor the current twelve-month periodyears 2009 and $75,000 in the comparable period in 2005.
Provision for Income Taxes
The Corporation’s provision forCorporation recorded income taxes decreased from 2005 to 2006, primarily as a resulttax expense of a decline of $8.3$1.5 million of pre-tax income asin 2009 compared to 2005, the recognition$1.6 million in 2008 and a tax benefit of a pre-tax net loss on securities sales of $3.7$2.9 million which occurred in March 2006, coupled with2007. The recorded tax benefits in 2007 resulted largely from a change in the Corporation’s business entity structure, which resulted inled to the recognition of a $1.3 million tax benefit in 2007 and a $1.4 million tax benefit in 2006. These tax benefits were attributable to a plan of liquidation adopted by the fourth quarterCorporation for its REIT subsidiary, which was completed on November 30, 2007. As a result of 2006. Thethe further liquidation of certain other subsidiaries relating to the business entity restructuring, the Corporation recorded anbegan to provide for income tax benefit of $3.3 million for the twelve months ended December 31, 2006 as compared with tax expense of $1.2 million for the comparable twelve-month period in 2005.2008. The effective tax rates for the Corporation for the years ended December 31, 2006, 20052009, 2008 and 20042007 were (247.4)24.5 percent, 13.4121.1 percent and 17.56(317.8) 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 Corporation adjusts its expected annual tax rate on a quarterly basis based on the current projections of non-deductible expenses, tax- exempttax-exempt interest income, increase in the cash surrender value of bank owned life insurance and pre-tax net earnings.
Tax-exempt interest income on a fully tax equivalent basis decreased by $1.4$2.4 million, or 17.061.3 percent, from 20052008 to 2006,2009, and increaseddecreased by $2.2$1.7 million, or 36.7529.9 percent, from 20042007 to 2005.2008. The Corporation recorded income related to the cash surrender value of bank ownedbank-owned life insurance as a component of other income in the amount of $780,000, $740,000$1,156,000, $1,203,000 and $734,000$893,000 for 2006, 20052009, 2008 and 2004,2007, respectively.
Recent Accounting Pronouncements
Note 42 of the Notes to Consolidated Financial Statements discusses new accounting policies adopted by the Corporation during 2006 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations, or liquidity, the impacts are discussed in the applicable sections of the financial review and notes to the consolidated financial statements.
On June 29, 2009, the FASB issued FASB ASC 105-10-65 (previously SFAS No. 168, “Share-Based Payments
In April 2009, the FASB issued three amendments to Certain Investments.” EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value measurement, disclosure and other-than-temporary impairment standards:
FASB ASC 820-10-05 (previously SFAS No. 157, “Fair Value Measurements”) defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FASB ASC 820-10-05 provides additional guidance on identifying circumstances when a transaction may not be considered orderly.
FASB ASC 820-10-65 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the investmentinformation from that market is less than its cost. Generally,needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with FASB ASC 820-10-05.
FASB ASC 820-10-65 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of evidence to determine whether the transaction is orderly. It also provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
FASB ASC 320-10-65 amends other-than-temporary impairment is consideredguidance for debt securities and expands disclosure requirements for other-than-temporarily impaired debt and equity securities. FASB ASC 320-10-65 requires companies to record other-than-temporary unless: (i)impairment charges, through earnings, if they have the investor has the ability and intent to holdsell, or will more likely than not be required to sell, an investment forimpaired debt security before a reasonable period of time sufficient for an anticipated recovery of fair value upits amortized cost basis. In addition, FASB ASC 320-10-65 requires companies to (or beyond)record other-than-temporary impairment charges through earnings for the costamount of credit losses, regardless of the investment; and (ii) evidence indicating that the cost of the investmentintent or requirement to sell. Credit loss is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal tomeasured as the difference between the investment’s costpresent value of an impaired debt security’s cash flows and its amortized cost basis. Non-credit related write-downs to fair value. Certain disclosure requirementsvalue must be recorded as decreases to accumulated other comprehensive income as long as a company has no intent or requirement to sell an impaired security before a recovery of EITF 03-1 were adopted in 2004 and the Corporation began presenting the new disclosure requirements in its Consolidated Financial Statements for the year ended December 31, 2004. The recognition and measurement provisions were initially effective foramortized cost basis. Finally, FASB ASC 320-10-65 requires companies to record all previously recorded non-credit related other-than-temporary impairment evaluations incharges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption.
FASB ASC 825-10-65 (previously SFAS 107-1 and APB 28-1) requires disclosures about fair value of financial instruments for interim reporting periods beginningof publicly traded companies as well as in annual financial statements. FASB ASC 825-10-65 also requires those disclosures in summarized financial information at interim reporting periods.
All three FASB ASC’s discussed herein include substantial additional disclosure requirements. The effective date for these new ASC’s is the same: interim and annual reporting periods ended after June 15, 2005. However, in September 2005, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance.
On May 28, 2009, the FASB issued FASB ASC 855-10-05 (previously SFAS No. 165, “Subsequent Events”). Under FASB ASC 855-10-05, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of operationsnon-public entities. FASB ASC 855-10-05 requires entities to recognize in the financial statements
the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement disclosures.
On June 12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Accounting Standards Board (FASB) issuedAssets” (“FAS 166”), and SFAS No. 167, “Amendments to FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48)46(R)” (“FAS 167”), which clarifieschange the accountingway entities account for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact ofsecuritizations and special-purpose entities.
FAS 166 is a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustmentrevision to opening retained earnings. Management has evaluated the impact of adopting FIN 48 on the Corporation’s financial statements and does not expect that the application of FIN 48 will have a material impact on its consolidated financial condition, results of operations or financial statements disclosures.
FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the accounting for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This statement permits, but does not require,activities of the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigatemost significantly impact the risks inherent in servicing assetsentity’s economic performance.
Both FAS 166 and servicing liabilities is required to account for those derivative instruments at fair value. Under this Statement, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because this Statement permits income statement recognitionFAS 167 will be effective as of the potential offsetting changes in fair valuebeginning of those servicing assetseach reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and servicing liabilitiesfor interim and derivative instruments inannual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of FAS 166 shall be applied to transfers that occur on or after the same accounting period. The Statement is effective in the first fiscal year beginning after September 15, 2006 with earlier adoption permitted.date. The Corporation adopted FASB No. 154both FAS 166 and FAS 167 on January 1, 2010, as of December 31, 2006 and there was no impact to the Corporation’s consolidated financial position, results of operations and cash flows.
In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of SFAS No. 157financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial positionstatements, and results of operations.
Asset and Liability Management
Asset and Liabilityliability 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.
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-assetearning asset matures or when its interest rate changes in a time period different than 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 than that of an earning-assetearning 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 in part 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 falling rate environment. From time to time, the Corporation may elect to deliberately mismatch liabilities and assets in a strategic gap position.
At December 31, 2006,2009, the Corporation reflectsreflected a negativepositive interest sensitivity gap (or an interest sensitivity ratio of .53:1:09:1.00) at the cumulative one-year position. During all of 2006 and 2005, the Corporation had a negative interest sensitivity gap. The rising rates and a flattening of the yield curve during 2006 affected net interest margins. Based on management’s perception that interest rates will continue to be volatile, projected increased levels of prepayments on the earning-assetearning asset portfolio and the current level of interest rates, emphasis has been, and is expected to continue to be, placed on interest-sensitivity matching with the objective of stabilizingcontinuing to stabilize the net interest spread and margin during 2007.2010. 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, 2006:2009:
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| Expected Maturity/Principal Repayment December 31, | ||||||||||||||||||||||||||||||||||||
| Average Interest Rate | Year End 2010 | Year End 2011 | Year End 2012 | Year End 2013 | Year End 2014 | 2015 and Thereafter | Total Balance | Estimated Fair Value | ||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
| Interest-Earning Assets: | ||||||||||||||||||||||||||||||||||||
| Loans, net | 5.33 | % | $ | 340,977 | $ | 90,254 | $ | 74,772 | $ | 90,302 | $ | 54,959 | $ | 55,914 | $ | 707,178 | $ | 713,474 | ||||||||||||||||||
| Investments | 4.10 | % | 54,407 | 40,772 | 37,460 | 20,014 | 14,566 | 130,905 | 298,124 | 298,124 | ||||||||||||||||||||||||||
| Total interest-earning assets | $ | 395,384 | $ | 131,026 | $ | 112,232 | $ | 110,316 | $ | 69,525 | $ | 186,819 | $ | 1,005,302 | $ | 1,011,598 | ||||||||||||||||||||
| Interest-Bearing Liabilities: | ||||||||||||||||||||||||||||||||||||
| Time certificates of deposit of $100 or greater | 1.38 | % | $ | 141,827 | $ | 2,119 | $ | 753 | $ | 103 | $ | — | $ | — | $ | 144,802 | $ | 145,219 | ||||||||||||||||||
| Time certificates of deposit of less than $100 | 1.75 | % | 69,688 | 6,836 | 3,391 | 258 | — | — | 80,173 | 80,543 | ||||||||||||||||||||||||||
| Other interest-bearing deposits | 0.84 | % | 60,770 | 60,770 | 68,842 | 59,256 | 100,302 | 108,272 | 458,212 | 458,212 | ||||||||||||||||||||||||||
| Subordinated debentures | 3.23 | % | 5,155 | — | — | — | — | — | 5,155 | 5,155 | ||||||||||||||||||||||||||
| Securities sold under agreements to repurchase and Fed Funds Purchased | 3.35 | % | 46,109 | 12,000 | — | — | — | 41,000 | 99,109 | 101,555 | ||||||||||||||||||||||||||
| Term borrowings | 4.09 | % | 40,144 | 10,000 | — | 5,000 | — | 115,000 | 170,144 | 177,664 | ||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 363,693 | $ | 91,725 | $ | 72,986 | $ | 64,617 | $ | 100,302 | $ | 264,272 | $ | 957,595 | $ | 968,348 | ||||||||||||||||||||
| Cumulative interest-earning assets | $ | 395,384 | $ | 526,410 | $ | 638,642 | $ | 748,958 | $ | 818,483 | $ | 1,005,302 | $ | 1,005,302 | ||||||||||||||||||||||
| Cumulative interest-bearing liabilities | 363,693 | 455,418 | 528,404 | 593,021 | 693,323 | 957,595 | 957,595 | |||||||||||||||||||||||||||||
| Rate sensitivity gap | 31,691 | 39,301 | 39,246 | 45,699 | (30,777 | ) | (77,453 | ) | 47,707 | |||||||||||||||||||||||||||
| Cumulative rate sensitivity gap | 31,691 | 70,992 | 110,238 | 155,937 | 125,160 | 47,707 | 47,707 | |||||||||||||||||||||||||||||
| Cumulative gap ratio | 1.09 | % | 1.16 | % | 1.21 | % | 1.26 | % | 1.18 | % | 1.05 | % | 1.05 | % | ||||||||||||||||||||||
Expected Maturity/Principal Repayment December 31, | ||||||||||||||||||||||||||||
Average Interest Rate | Year End 2007 | Year End 2008 | Year End 2009 | Year End 2010 | Year End 2011 | 2012 and Thereafter | Total Balance | Estimated Fair Value | ||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
| INTEREST-EARNING ASSETS: | ||||||||||||||||||||||||||||
| Loans | 6.38 | % | $ | 199,109 | $ | 102,115 | $ | 67,982 | $ | 58,305 | $ | 31,078 | $ | 86,865 | $ | 545,454 | $ | 541,672 | ||||||||||
| Restricted Investment in bank stocks | 6.21 | % | 7,805 | 0 | 0 | 0 | 0 | 0 | 7,805 | 7,805 | ||||||||||||||||||
| Fed Funds Sold | 5.25 | % | 10,275 | 0 | 0 | 0 | 0 | 0 | 10,275 | 10,275 | ||||||||||||||||||
| Investments | 4.62 | % | 104,899 | 58,358 | 38,340 | 31,671 | 31,394 | 117,071 | 381,733 | 381,503 | ||||||||||||||||||
| Total interest-earning assets | $ | 322,088 | $ | 160,473 | $ | 106,322 | $ | 89,976 | $ | 62,472 | $ | 203,936 | $ | 945,267 | $ | 941,255 | ||||||||||||
| INTEREST-BEARING LIABILITIES: | ||||||||||||||||||||||||||||
| Time certificates of deposit of $100 or greater | 4.80 | % | $ | 80,858 | $ | 999 | $ | 1,450 | $ | 316 | $ | 0 | $ | 0 | $ | 83,623 | $ | 83,516 | ||||||||||
| Time certificates of deposit of less than $100 | 4.60 | % | 107,650 | 4,849 | 1,927 | 1,115 | 11 | 3 | 115,555 | 115,285 | ||||||||||||||||||
| Other interest-bearing deposits | 3.04 | % | 263,789 | 0 | 0 | 0 | 0 | 127,351 | 391,140 | 391,140 | ||||||||||||||||||
| Subordinated Debentures | 8.12 | % | 5,155 | 0 | 0 | 0 | 0 | 0 | 5,155 | 4,444 | ||||||||||||||||||
| Securities sold under agreements to repurchase and Fed Funds Purchased | 3.94 | % | 97,443 | 0 | 0 | 0 | 0 | 0 | 97,443 | 97,691 | ||||||||||||||||||
| Term Borrowings | 4.66 | % | 47,468 | 1,245 | 152 | 50,126 | 10,000 | 0 | 108,991 | 109,858 | ||||||||||||||||||
| Total interest-bearing liabilities | $ | 602,363 | $ | 7,093 | $ | 3,529 | $ | 51,557 | $ | 10,011 | $ | 127,354 | $ | 801,907 | $ | 801,934 | ||||||||||||
| Cumulative interest-earning assets | 322,088 | 482,561 | 588,883 | 678,859 | 741,331 | 945,267 | 945,267 | |||||||||||||||||||||
| Cumulative interest-bearing liabilities | 602,363 | 609,456 | 612,985 | 664,542 | 674,553 | 801,907 | 801,907 | |||||||||||||||||||||
| Rate sensitivity gap | (280,275 | ) | 153,380 | 102,793 | 38,419 | 52,461 | 76,582 | 143,360 | ||||||||||||||||||||
| Cumulative rate sensitivity gap | $ | (280,275 | ) | $ | (126,895 | ) | $ | (24,102 | ) | $ | 14,317 | $ | 66,778 | $ | 143,360 | $ | 143,360 | |||||||||||
| Cumulative gap ratio | 0.53 | % | 0.79 | % | 0.96 | % | 1.02 | % | 1.10 | % | 1.18 | % | 1.18 | % | ||||||||||||||
Estimates of Fair Value
The estimation of fair value is significant to a number of the Corporation’s assets, including loans held for sale, and available for saleavailable-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available for sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Corporation’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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. Scheduled principal loan repayments, maturing investments, short-term liquid assets and deposit in-flows, can satisfy such needs. 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 cash flows, 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 respond adequately to situations which could lead to liquidity concerns.
Management believes that the Corporation has the funding capacity to meet the liquidity needs arising from potential events. In addition to pledgeable securities, the Corporation also maintains borrowing capacity through the Federal Discount Window and the Federal Home Loan Bank of New York secured with loans and marketable securities.
Liquidity is measured and monitored for the Corporation’s bank subsidiary, Union Center National Bank (the “Bank”). The Corporation reviews its net short-term mismatch. This measures the ability of the Corporation to meet obligations should access to Bank dividends be constrained. At December 31, 2006,2009, the Parent Corporation had $5.3$3.2 million in cash and short-term investments compared to $18.5$2.2 million at December 31, 2005. The change in cash at the Parent Corporation level was due in part to the use of funds for the Corporation’s common stock buyback program and the redemption of $10.3 million of subordinated debt.2008. Expenses at the Parent Corporation are moderate and management believes that the Parent Corporation has adequate liquidity to fund its obligations.
Certain provisions of long-term debt agreements, primarily subordinated debt, prevent the Corporation from creating liens on, disposing of or issuing voting stock of subsidiaries. As of December 31, 20062009, the Corporation was in compliance with all covenants and provisions of these agreements.
Management monitors current and projected cash flows, 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 somewhat reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations which could lead to liquidity concerns.
Based on anticipated cash flows at December 31, 2006,2009 projected to December 31, 2007, indicates2010, the Corporation believes that the Bank’s liquidity should remain strong, with an approximate projection of $185.4$367.1 million in anticipated cash flows over the next twelve months. This projection represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from this projection depending upon a number of factors, including the liquidity needs of the Bank’s customers, the availability of sources of liquidity and general economic conditions.
On September 30, 2009, the FDIC proposed a rule that required insured institutions to prepay their estimated quarterly assessments through December 31, 2012 to strengthen the cash position of the Deposit Insurance Fund. The cash prepayment was made on December 30, 2009 and amounted to approximately $5.7 million, which included the 2009 fourth quarter assessment. The prepayment did not have a significant impact on the Corporation’s future cash position or operations.
Deposits
Total deposits increased to $726.8$813.7 million on December 31, 20062009 from $700.6$659.5 million at December 31, 2005,2008, an increase of $26.2$154.2 million, or 3.7423.4 percent.
Total non-interest-bearing deposits decreasedincreased from $139.9$113.3 million at December 31, 2008 to $136.4$130.5 million a decreaseat December 31, 2009, an increase of $3.5$17.2 million or 2.4715.2 percent. Time, savings and interest-bearing transaction accounts increased from $406.3$546.2 million on December 31, 20052008 to $506.7$683.2 million at December 31, 2006,2009, an increase of $100.4$137.0 million or 24.725.1 percent. During 2006The increase in deposits was reflective of customers’ desire for safety and liquidity and flight to quality in light of the Corporation experienced a shift in itsfinancial crisis.
Certificates of deposit mix to more costly interest-bearing deposits, driven by the changes that occurred in interest rates. In 2005, the Corporation acquired $62.7 million in interest-bearing transaction accounts from the Red Oak Bank acquisition. Time deposits $100,000 and over decreased $70.8 millionincreased to $83.6 million. The Red Oak Bank acquisition contributed $42.017.8 percent of total deposits at December 31, 2009 from 15.2 percent one year earlier. With the current turmoil in the financial markets, some of the Corporation’s depositors have become sensitive to obtaining full FDIC insurance for their time deposits. To accommodate its customers, the Corporation began offering Certificates of Deposit Account Registry Service (CDARS) in 2008. As a result of this offering and the temporary increase in insurance coverage by the FDIC to $250,000, the Corporation reported an increase of $44.3 million in timecertificates of deposit greater than $100,000 at December 31, 2009 compared to year-end 2008.
At December 31, 2009, the Corporation had a total of $111.3 million with a weighted average rate of 1.24 percent in CDARS Reciprocal deposits including $13.0compared to $87.9 million with a weighted average rate of 2.52 percent at December 31, 2008. Based on the Bank’s participation in Promontory Interfinancial Network, LLC., customers who are FDIC insurance sensitive are able to place large dollar deposits with the Corporation and the Corporation uses CDARS to place those funds into certificates of deposit issued by other banks in the Network. This occurs in increments of less than the FDIC insurance limits so that both the principal and interest are eligible for complete FDIC protection. The FDIC currently considers these funds as brokered deposits. All brokered deposits are classified in time deposits $100,000deposits. It became apparent during the latter half of 2008 that customers’ preference in seeking safety and over.
The Corporation derives a significant proportion of its liquidity from its core deposit base. For the twelve-month periodyear ended December 31, 2006,2009, core deposits, comprised of total demand deposits, savings and money market accounts, increaseddecreased by $75.8$166.4 million or 16.7838.7 percent from December 31, 20052008 to $527.5$596.7 million. At December 31, 2006,2009, core deposits were 72.673.3 percent of total deposits compared to 64.566.6 percent at year-end 2005.2008. Alternatively, the Corporation uses a more stringent calculation for the management of its liquidity positions internally which consists of total demand and savings accounts (excluding money market accounts greater than $100,000) and excludes time deposits as part of core deposits as a percentage of total deposits. This number represented 49.5846.6 percent of total deposits at December 31, 20062009 as compared with 47.7853.0 percent at December 31, 2005.
The following table depicts the Corporation’s core deposit mix at December 31, 20062009 and 2005.2008.
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| December 31, | Net Change Volume 2009 vs. 2008 | |||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Demand Deposits | $ | 130,518 | 34.4 | $ | 113,319 | 32.4 | $ | 17,199 | ||||||||||||
| Interest-Bearing Demand | 156,738 | 41.3 | 139,349 | 39.9 | 17,389 | |||||||||||||||
| Regular Savings | 58,240 | 15.4 | 56,431 | 16.2 | 1,809 | |||||||||||||||
| Money Market Deposits under $100 | 33,795 | 8.9 | 40,419 | 11.5 | (6,624 | ) | ||||||||||||||
| Total core deposits | $ | 379,291 | 100.0 | $ | 349,518 | 100.0 | $ | 29,773 | ||||||||||||
| Total deposits | $ | 813,705 | $ | 659,537 | $ | 154,168 | ||||||||||||||
| Core deposits to total deposits | 46.61 | % | 52.99 | % | ||||||||||||||||
December 31, | Net Change Volume 2006 vs. 2005 | |||||||||||||||
2006 | 2005 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Demand Deposits | $ | 136,284 | 37.8 | $ | 139,723 | 41.7 | $ | (3,439 | ) | |||||||
| Interest-Bearing Demand | 107,359 | 29.8 | 100,610 | 30.1 | 6,749 | |||||||||||
| Regular Savings | 58,389 | 16.2 | 72,624 | 21.7 | (14,235 | ) | ||||||||||
| Money Market Deposits under $100 | 58,290 | 16.2 | 21,775 | 6.5 | 36,515 | |||||||||||
| Total core deposits | $ | 360,322 | 100.0 | $ | 334,732 | 100.0 | $ | 25,590 | ||||||||
| Total deposits | $ | 726,771 | $ | 700,601 | $ | 26,170 | ||||||||||
| Core deposits to total deposits | 49.58 | % | 47.78 | % | ||||||||||||
Short-Term Borrowings
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 Federal fundsFunds purchased and securities sold under agreementagreements to repurchase. Average short-termShort-term borrowings, including federal fundsFederal Funds purchased during 2006and securities sold under agreements to repurchase, amounted to approximately $96.4$46.1 million a decreaseat year-end 2009, an increase of $22.7 million$966,000 or 19.12.1 percent from 2005.
The following table is a summary of short-term securities sold under repurchase agreements for each of the last three years.
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| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Short-term securities sold under repurchase agreements: | ||||||||||||
| Average interest rate: | ||||||||||||
| At year end | 0.97 | % | 1.98 | % | 3.85 | % | ||||||
| For the year | 1.38 | % | 2.39 | % | 3.60 | % | ||||||
| Average amount outstanding during the year | $ | 35,392 | $ | 43,973 | $ | 33,683 | ||||||
| Maximum amount outstanding at any month end | $ | 58,515 | $ | 52,992 | $ | 48,541 | ||||||
| Amount outstanding at year end | $ | 46,109 | $ | 30,143 | $ | 48,541 | ||||||
December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Securities sold under repurchase agreements: | ||||||||||
| Average interest rate: | ||||||||||
| At year end | 4.20 | % | 2.44 | % | 1.29 | % | ||||
| For the year | 3.78 | % | 0.82 | % | 0.80 | % | ||||
| Average amount outstanding during the year: | $ | 96,381 | $ | 119,079 | $ | 105,449 | ||||
| Maximum amount outstanding at any month end: | $ | 103,447 | $ | 160,842 | $ | 131,791 | ||||
| Amount outstanding at year end: | $ | 97,443 | $ | 75,693 | $ | 84,757 | ||||
Long-Term Borrowings
Long-term borrowings consist of Federal Home Loan Bank of New York (“FHLB”) advances and securities sold under agreements to repurchase that have contractual maturities over one year. Long-term borrowings amounted to $223.1 million at December 31, 2009, a decrease of $153,000 from year-end 2008.
Cash Flows
The consolidated statements of cash flows present the changes in cash and cash equivalents from operating, investing and financing activities. During 2006,2009, cash and cash equivalents (which increased overall by $25.0$74.1 million) were provided on a net basis by operating activities and financing activities and used on a net basis by investing activities. Cash flows from financing activities, primarily due to a net increase in deposits, were partially offset by an increase in financing activities, primarily resulting from an increase in securities and loans.
During 2008, cash and cash equivalents (which decreased overall by $55.0 million) were used on a net basis by operating activities and investing activities and provided on a net basis by financing activities. Cash flows from investing activities, primarily due to a net decrease in securities, were partially offset by an increase in financing activities, primarily resulting from an increase in borrowings.
During 2007, cash and cash equivalents (which increased overall by $25.7 million) were provided on a net basis by operating and investing activities and used on a net basis by a reduction in financing activities. Cash flows from operatinginvesting activities, primarily net income and cash flow resulting from an increase in other liabilities, and investing activities, primarilydue to a net decrease in securities, were partially offset in part by a net increase in loans, were useddecrease in financing activities, reflectingprimarily resulting from a reduction in borrowings, redemptiondeposits, as well as funding dividends paid and the purchase of subordinated debentures and payment of dividends.treasury stock.
Contractual Obligations and otherOther Commitments
The following table summarizes our contractual obligations at December 31, 20062009 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
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| Total | Less Than 1 Year | 1 – 3 Years | 4 – 5 Years | After 5 Years | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||
| Operating lease obligations | $ | 7,714 | $ | 592 | $ | 1,232 | $ | 1,033 | $ | 4,857 | ||||||||||
| Total contracted cost obligations | $ | 7,714 | $ | 592 | $ | 1,232 | $ | 1,033 | $ | 4,857 | ||||||||||
| Other Long-term Liabilities/Long-term Debt | ||||||||||||||||||||
| Time Deposits | $ | 224,974 | $ | 213,400 | $ | 11,213 | $ | 361 | $ | — | ||||||||||
| Federal Home Loan Bank advances and repurchase agreements | 269,253 | 86,253 | 22,000 | 5,000 | 156,000 | |||||||||||||||
| Subordinated debentures | 5,155 | 5,155 | — | — | — | |||||||||||||||
| Total Other Long-term Liabilities/Long-term Debt | $ | 499,382 | $ | 304,808 | $ | 33,213 | $ | 5,361 | $ | 156,000 | ||||||||||
| Other Commercial Commitments – Off Balance Sheet | ||||||||||||||||||||
| Commitments under commercial loans and lines of credit | $ | 70,076 | $ | 70,076 | $ | — | $ | — | $ | — | ||||||||||
| Home equity and other revolving lines of credit | 54,572 | 54,572 | — | — | — | |||||||||||||||
| Outstanding commercial mortgage loan commitments | 33,659 | 20,596 | 13,063 | — | — | |||||||||||||||
| Standby letters of credit | 1,676 | 1,676 | — | — | — | |||||||||||||||
| Performance letters of credit | 11,466 | 11,466 | — | — | — | |||||||||||||||
| Outstanding residential mortgage loan commitments | 4,153 | 4,153 | — | — | — | |||||||||||||||
| Overdraft protection lines | 5,058 | 5,058 | — | — | — | |||||||||||||||
| Other consumer | 11 | 11 | — | — | — | |||||||||||||||
| Total off balance sheet arrangements and contractual obligations | $ | 180,671 | $ | 167,608 | $ | 13,063 | $ | — | $ | — | ||||||||||
| Total contractual obligations and other commitments | $ | 687,767 | $ | 473,008 | $ | 47,508 | $ | 6,394 | $ | 160,857 | ||||||||||
Total | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
Contractual obligations | ||||||||||||||||
| Operating lease obligations | $ | 6,590 | $ | 736 | $ | 1,571 | $ | 1,661 | $ | 2,622 | ||||||
| Total contracted cost obligations | $ | 6,590 | $ | 736 | $ | 1,571 | $ | 1,661 | $ | 2,622 | ||||||
Other Long-term Liabilities/Long-term Debt | ||||||||||||||||
| Time Deposits | 199,178 | 188,509 | 9,226 | 1,443 | — | |||||||||||
| Overnight Federal funds purchased | — | — | — | — | — | |||||||||||
| Federal Home Loan Bank advances and repurchase agreements | 206,434 | 144,911 | 1,397 | 60,126 | — | |||||||||||
| Expected contributions under defined benefit plans | 850 | 850 | — | — | — | |||||||||||
| Subordinated debentures | 5,155 | — | 5,155 | — | — | |||||||||||
| Total Other Long-term Liabilities/Long-term Debt | $ | 411,617 | $ | 334,270 | $ | 15,778 | $ | 61,569 | $ | — | ||||||
| Other Commercial Commitments – Off balance sheet | ||||||||||||||||
| Letter of credit | 18,379 | 18,190 | 189 | — | — | |||||||||||
| Other commercial commitments – Off balance sheet | 67,949 | 59,217 | 5,297 | — | 3,435 | |||||||||||
| Total off balance sheet arrangements and contractual obligations | $ | 86,328 | $ | 77,407 | $ | 5,486 | $ | — | $ | 3,435 | ||||||
| Total contractual obligations and other commitments | $ | 505,435 | $ | 412,413 | $ | 22,835 | $ | 63,230 | $ | 6,057 | ||||||
Stockholders’ Equity
Stockholders’ equity averaged $96.5amounted to $102.6 million during 2006,at December 31, 2009, an increase of $10.7$20.9 million or 12.5125.5 percent, as compared to 2005.year-end 2008. At December 31, 2006,2008, stockholders’ equity totaled $97.6$81.7 million, a decrease of $1.9$3.6 million from December 31, 2005.2007.
On January 12, 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury under the Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the U.S. Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. As previously announced, the Corporation’s voluntary participation in the Capital Purchase Program amounted to approximately 50 percent of what the Corporation had qualified for under the U.S. Treasury program. The funding was used to support the balance sheet. As a result of the successful completion of the Rights Offering in October 2009, the number of shares underlying the warrant held by the U.S. Treasury was reduced to 86,705 shares or 50 percent of the original 173,410 shares.
In July 2009, the Corporation announced that its Board of Directors had authorized a rights offering of up to approximately $11 million of common stock to its existing stockholders. In October, the Corporation successfully raised total gross proceeds of approximately $11 million in its rights offering and optional stock purchase plan coupleda private placement with option activity contributed $658,000 in new capital during 2006. its standby purchaser.
Book value per share at year-end 20062009 was $7.37$6.38 compared to $7.41$6.29 at year-end 2005.2008. Tangible book value at year-end 20062009 was $6.06$5.21 compared to $6.11$4.97 at year end 2005;2008; see itemItem 6 for a reconciliation of this non-GAAP financial measure to book value. The decline in 2006 as compared to 2005 reflects
During the change in goodwill and other intangible assets,year of 2009, the reduction in capital as a resultCorporation made no purchases of the repurchase of shares and changes in other comprehensive income.
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
The Tier I leverage capital at December 31, 20062009 (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) amounted to $88.0$99.3 million or 8.377.80 percent of average total assets. At December 31, 2006,2008, the Corporation’s Tier I risk-basedleverage capital amounted to $88.0$78.2 million or 8.647.71 percent of total assets. Tier I capital excludes the effect of SFAS No. 115,FASB ASC 320-10-05, which amounted to $2.5$8.4 million 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 is reduced by goodwill and intangible assets of $17.3$17.0 million as of December 31, 2006.2009. For information on goodwill and intangible assets, see Note 21 to the Consolidated Financial Statements.
United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize 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, 2006,2009, the Corporation’s Tier 1I and total risk-based capital ratios were 13.1411.51 percent and 13.8812.46 percent, respectively. These ratios are well above the minimum guidelines of capital to risk-adjusted assets in effect as of December 31, 2006. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 13 to the Consolidated Financial Statements.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings and other factors. The OCC has established higher minimum capital ratios for the Bank effective as of December 31, 2009: Tier 1 Risk-Based Capital of 10 percent, Total Risk-Based Capital of 12 percent and Tier 1 Leverage Capital of 8 percent. As of December 31, 2006,2009, management believes that each of the Bank and the Parent Corporation meet all capital adequacy requirements to which it is subject.
Subordinated Debentures
On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million of, MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Corporation and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinatesubordinated debentures are redeemable in whole or in part, prior to maturity but after January 23, 2009. The floating interest rate on the subordinate debentures is three-month LIBOR plus 2.85%2.85 percent and reprices quarterly. The rate at December 31, 20062009 was 8.23%.
The additional capital raised with respect to the issuance of the floating rate capital pass throughpass-through securities was used to bolster the Corporation’s capital and for general corporate purposes, including capital contributions to Union Center National Bank. Additional information regarding the capital treatment of these securities is contained by reference toin Note 1410 of the Notes to the Consolidated Financial Statements.
Looking Forward
One of the Corporation’s primary objectives is to achieve balanced asset and revenue growth, and at the same time expand market presence and diversify its financial products. However, it is recognized that objectives, no matter how focused, are subject to factors beyond the control of the Corporation, which can impede its ability to achieve these goals. The following factors should be considered when evaluating the Corporation’s ability to achieve its objectives:
The financial market place is rapidly changing. Banks are no longer the only place to obtain loans, nor the only place to keep financial assets. The banking industry has lost market share to other financial service providers. The future is predicated on the Corporation’s ability to adapt its products, provide superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted favorably or unfavorably by changes in interest rates. Although the impact of interest rate fluctuations is mitigated by ALCO strategies, significant changes in interest rates can have a material 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 when the Boardmanagement determines such action to be appropriate, significant unfavorable changes in the economy could impact the assumptions used in the determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial service companies compete for and deliver services. It is recognized that these changes will have a direct impact on how the marketplace is approached and ultimately on profitability. The Corporation has taken steps to improve its traditional delivery channels. However, continued success will likely be measured by the ability to anticipate and react to future technological changes.
This “Looking Forward” description constitutes a forward-looking statement under the Private Securities Litigation Reform Act of 1995. 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, in Item 1A ifof this Annual Report on Form 10K and in other sections of this Annual Report on Form 10K.
Interest Sensitivity
Market Risk
The Corporation’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely affect 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
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 and fall in interest rates (“rate shock”), as well as gradual changes in interest rates over a 12-monthtwelve-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-assetearning asset and deposit growth, prepayments, interest rates and other factors.
Management believes that both individually and taken together, 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, 2006,2009, and assuming that management does not take action to alter the outcome, the Corporation would expect an increase of 10.7 percent in net interest income if interest rates decreased 200 basis points from the current rates in an immediate and parallel shock over a 12-month period. In a rising rate environment, based on the results of the model as of December 31, 2006, the Corporation would expect a decrease of 8.070.52 and 1.66 percent in net interest income if interest rates increased by 200 and 300 basis points, respectively, from current rates in an immediatea gradual and parallel shockrate ramp over a twelve month period.
The risingdeclining rates and a flatteningsteepening of the yield curve during 20062009 affected net interest margins. Based on management’s perception that interest rates will continue to be volatile, projected increased levels of prepayments on the earning-asset portfolio and the current level of interest rates, 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 2007.2010. However, no assurance can be given that this objective will be met.
Equity price risk
The Corporation is also exposed to equity price risk inherent in ourits portfolio of publicly traded equity securities, which had an estimated fair value of $4.1$0.3 million at December 31, 20062009 and $3.9$0.7 million at December 31, 2005. We monitor our2008. The Corporation monitors its equity investments for impairment on a periodic basis. In the event that the carrying value of the equity investment exceeds its fair value, and we determinethe Corporation determines the decline in value to be other than temporary, we reducethe Corporation reduces the carrying value to its current fair value.
All Financial Statements:
The following financial statements are filed as part of this report under Item 8 — “Financial Statements and Supplementary Data.”
| | |||
| Page | ||||
| F-2 | ||||
| Consolidated Statements of Condition | F-3 | |||
| Consolidated Statements of Income | F-4 | |||
| Consolidated Statements of Changes in Stockholders’ Equity | F-5 | |||
| Consolidated Statements of Cash Flows | F-6 | |||
| Notes to Consolidated Financial Statements | F-8 | |||
The Board of Directors and Stockholders
Center Bancorp, Inc.:
We have audited the accompanying consolidated statementstatements of condition of Center Bancorp, Inc. and subsidiaries (the “Corporation”) as of December 31, 2006,2009 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements of Center Bancorp, Inc. and subsidiaries as of December 31, 2005 and for the two years then ended, were audited by other auditors whose report thereon, dated March 8, 2006, expressed an unqualified opinion.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial position of Center Bancorp, Inc. and subsidiaries as of December 31, 2005,2009 and 2008, and the consolidated results of theirits operations and theirits cash flows for each of the years in the two-yearthree-year period ended December 31, 2005,2009 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Center Bancorp, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2010 expressed an unqualified opinion.
/s/ ParenteBeard LLC
ParenteBeard LLC
Reading, Pennsylvania
March 16, 2010
CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
| | | ||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In Thousands, Except Share Data) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 89,168 | $ | 15,031 | ||||
| Investment securities available-for-sale | 298,124 | 242,714 | ||||||
| Loans | 715,453 | 676,203 | ||||||
| Less: Allowance for loan losses | 8,275 | 6,254 | ||||||
| Net loans | 707,178 | 669,949 | ||||||
| Restricted investment in bank stocks, at cost | 10,672 | 10,230 | ||||||
| Premises and equipment, net | 17,860 | 18,488 | ||||||
| Accrued interest receivable | 4,033 | 4,154 | ||||||
| Bank owned life insurance | 26,304 | 22,938 | ||||||
| Other real estate owned | — | 3,949 | ||||||
| Goodwill and other intangible assets | 17,028 | 17,110 | ||||||
| Prepaid FDIC assessment | 5,374 | — | ||||||
| Other assets | 21,083 | 18,730 | ||||||
| Total assets | $ | 1,196,824 | $ | 1,023,293 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing | $ | 130,518 | $ | 113,319 | ||||
| Interest-bearing: | ||||||||
| Time deposits $100 and over | 144,802 | 100,493 | ||||||
| Interest-bearing transaction, savings and time deposits $100 and less | 538,385 | 445,725 | ||||||
| Total deposits | 813,705 | 659,537 | ||||||
| Short-term borrowings | 46,109 | 45,143 | ||||||
| Long-term borrowings | 223,144 | 223,297 | ||||||
| Subordinated debentures | 5,155 | 5,155 | ||||||
| Accounts payable and accrued liabilities | 6,160 | 8,448 | ||||||
| Total liabilities | 1,094,273 | 941,580 | ||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock, $1,000 liquidation value per share: | ||||||||
| Authorized 5,000,000 shares; issued 10,000 shares in 2009 and none in 2008 | 9,619 | — | ||||||
| Common stock, no par value: | ||||||||
| Authorized 20,000,000 shares; issued 16,762,412 shares in 2009 and 15,190,984 in 2008; outstanding 14,572,029 shares in 2009 and 12,991,312 in 2008 | 97,908 | 86,908 | ||||||
| Additional paid-in capital | 5,650 | 5,204 | ||||||
| Retained earnings | 17,870 | 16,309 | ||||||
| Treasury stock, at cost (2,190,383 in 2009 and 2,199,672 shares in 2008) | (17,720 | ) | (17,796 | ) | ||||
| Accumulated other comprehensive loss | (10,776 | ) | (8,912 | ) | ||||
| Total stockholders’ equity | 102,551 | 81,713 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,196,824 | $ | 1,023,293 | ||||
See the accompanying notes to the consolidated financial statements.
CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | |||||||||
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands, Except per Share Data) | ||||||||||||
| Interest income: | ||||||||||||
| Interest and fees on loans | $ | 36,751 | $ | 36,110 | $ | 33,527 | ||||||
| Interest and dividends on investment securities: | ||||||||||||
| Taxable interest income | 12,727 | 10,353 | 13,585 | |||||||||
| Non-taxable interest income | 989 | 2,547 | 3,171 | |||||||||
| Dividends | 643 | 771 | 1,242 | |||||||||
| Interest on federal funds sold and securities purchased under agreements to resell | — | 113 | 604 | |||||||||
| Total interest income | 51,110 | 49,894 | 52,129 | |||||||||
| Interest expense: | ||||||||||||
| Interest on certificates of deposit $100 and over | 3,551 | 2,411 | 3,964 | |||||||||
| Interest on other deposits | 8,757 | 10,876 | 16,871 | |||||||||
| Interest on short-term borrowings | 449 | 1,295 | 1,948 | |||||||||
| Interest on long-term borrowings | 9,888 | 9,513 | 7,847 | |||||||||
| Total interest expense | 22,645 | 24,095 | 30,630 | |||||||||
| Net interest income | 28,465 | 25,799 | 21,499 | |||||||||
| Provision for loan losses | 3,261 | 1,561 | 350 | |||||||||
| Net interest income, after provision for loan losses | 25,204 | 24,238 | 21,149 | |||||||||
| Other income: | ||||||||||||
| Service charges, commissions and fees | 1,835 | 2,015 | 1,824 | |||||||||
| Annuity and insurance | 126 | 112 | 298 | |||||||||
| Bank-owned life insurance | 1,156 | 1,203 | 893 | |||||||||
| Other | 298 | 420 | 457 | |||||||||
| Total other-than-temporary impairment losses | (9,066 | ) | (1,761 | ) | — | |||||||
| Less: Portion of loss recognized in other comprehensive income (before taxes) | 4,828 | — | — | |||||||||
| Net other-than-temporary impairment losses | (4,238 | ) | (1,761 | ) | — | |||||||
| Net gains on sale on investment securities | 4,729 | 655 | 900 | |||||||||
| Net investment securities gains (losses) | 491 | (1,106 | ) | 900 | ||||||||
| Total other income | 3,906 | 2,644 | 4,372 | |||||||||
| Other expense: | ||||||||||||
| Salaries and employee benefits | 9,915 | 8,505 | 11,436 | |||||||||
| Occupancy, net | 2,536 | 3,279 | 2,843 | |||||||||
| Premises and equipment | 1,263 | 1,436 | 1,777 | |||||||||
| FDIC Insurance | 2,055 | 217 | 86 | |||||||||
| Professional and consulting | 811 | 703 | 2,139 | |||||||||
| Stationery and printing | 339 | 397 | 465 | |||||||||
| Marketing and advertising | 366 | 637 | 603 | |||||||||
| Computer expense | 964 | 834 | 614 | |||||||||
| OREO expense, net | 1,438 | 31 | 110 | |||||||||
| Other | 3,370 | 3,434 | 4,525 | |||||||||
| Total other expense | 23,057 | 19,473 | 24,598 | |||||||||
| Income before income tax expense (benefit) | 6,053 | 7,409 | 923 | |||||||||
| Income tax expense (benefit) | 1,480 | 1,567 | (2,933 | ) | ||||||||
| Net income | 4,573 | 5,842 | 3,856 | |||||||||
| Preferred stock dividends and accretion | 567 | — | — | |||||||||
| Net income available to common stockholders | $ | 4,006 | $ | 5,842 | $ | 3,856 | ||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 0.30 | $ | 0.45 | $ | 0.28 | ||||||
| Diluted | $ | 0.30 | $ | 0.45 | $ | 0.28 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 13,382,614 | 13,048,518 | 13,780,504 | |||||||||
| Diluted | 13,385,416 | 13,061,410 | 13,840,756 | |||||||||
See the accompanying notes to the consolidated financial statements.
CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| | | | | | | | |||||||||||||||||||||
| | | | | | | | |||||||||||||||||||||
| Years Ended December 31, 2009, 2008 and 2007 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||
| (In Thousands, Except Share and per Share Data) | ||||||||||||||||||||||||||||
| Balance, December 31, 2006 | $ | — | $ | 77,130 | $ | 4,535 | $ | 25,989 | $ | (6,631 | ) | $ | (3,410 | ) | $ | 97,613 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | 3,856 | �� | 3,856 | |||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (2,414 | ) | (2,414 | ) | ||||||||||||||||||||||||
| Total comprehensive income | 1,442 | |||||||||||||||||||||||||||
| Cash dividends declared on common stock ($0.36 per share) | (4,885 | ) | (4,885 | ) | ||||||||||||||||||||||||
| 5 percent stock dividend | 9,778 | (9,778 | ) | — | ||||||||||||||||||||||||
| Issuance cost of common stock | (21 | ) | (21 | ) | ||||||||||||||||||||||||
| Exercise of stock options (95,861 shares) | 292 | 558 | 850 | |||||||||||||||||||||||||
| Stock-based compensation expense | 151 | 151 | ||||||||||||||||||||||||||
| Tax benefit related to stock-based compensation | 155 | 155 | ||||||||||||||||||||||||||
| Treasury stock purchased (850,527 shares) | (10,027 | ) | (10,027 | ) | ||||||||||||||||||||||||
| Balance, December 31, 2007 | $ | — | $ | 86,908 | $ | 5,133 | $ | 15,161 | $ | (16,100 | ) | $ | (5,824 | ) | $ | 85,278 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | 5,842 | 5,842 | ||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (3,088 | ) | (3,088 | ) | ||||||||||||||||||||||||
| Total comprehensive income | 2,754 | |||||||||||||||||||||||||||
| Cash dividends declared on common stock of ($0.36 per share) | (4,675 | ) | (4,675 | ) | ||||||||||||||||||||||||
| Issuance cost of common stock | (19 | ) | (19 | ) | ||||||||||||||||||||||||
| Restricted stock award (3,028 shares) | 25 | 25 | ||||||||||||||||||||||||||
| Exercise of stock options (25,583 shares) | 21 | 203 | 224 | |||||||||||||||||||||||||
| Stock-based compensation expense | 128 | 128 | ||||||||||||||||||||||||||
| Taxes related to stock-based compensation | (78 | ) | (78 | ) | ||||||||||||||||||||||||
| Treasury stock purchased (193,083 shares) | (1,924 | ) | (1,924 | ) | ||||||||||||||||||||||||
| Balance, December 31, 2008 | $ | — | $ | 86,908 | $ | 5,204 | $ | 16,309 | $ | (17,796 | ) | $ | (8,912 | ) | $ | 81,713 | ||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | 4,573 | 4,573 | ||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (1,864 | ) | (1,864 | ) | ||||||||||||||||||||||||
| Total comprehensive income | 2,709 | |||||||||||||||||||||||||||
| Issuance of preferred stock (10,000 shares) and warrants (86,705 shares) | 9,539 | 461 | 10,000 | |||||||||||||||||||||||||
| Accretion of discount on preferred stock | 80 | (80 | ) | — | ||||||||||||||||||||||||
| Dividends on preferred stock | (487 | ) | (487 | ) | ||||||||||||||||||||||||
| Proceeds from rights offering (1,571,428 shares) | 11,000 | 11,000 | ||||||||||||||||||||||||||
| Cash dividends declared on common stock ($0.18 per share) | (2,434 | ) | (2,434 | ) | ||||||||||||||||||||||||
| Issuance cost of common stock | (11 | ) | (11 | ) | ||||||||||||||||||||||||
| Exercise of stock options (9,289 shares) | (19 | ) | 76 | 57 | ||||||||||||||||||||||||
| Stock-based compensation expense | 77 | 77 | ||||||||||||||||||||||||||
| Taxes related to stock-based compensation | (73 | ) | (73 | ) | ||||||||||||||||||||||||
| Balance, December 31, 2009 | $ | 9,619 | $ | 97,908 | $ | 5,650 | $ | 17,870 | $ | (17,720 | ) | $ | (10,776 | ) | $ | 102,551 | ||||||||||||
See the accompanying notes to the consolidated financial statements.
CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | |||||||||
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 4,573 | $ | 5,842 | $ | 3,856 | ||||||
| Adjustments to Reconcile Net Income to Net Cash (Used In) Provided by Operating Activities: | ||||||||||||
| Depreciation and amortization | 1,451 | 1,832 | 1,700 | |||||||||
| Provision for loan losses | 3,261 | 1,561 | 350 | |||||||||
| Provision (benefit) for deferred taxes | 1,353 | 1,221 | (4,939 | ) | ||||||||
| Stock-based compensation expense | 77 | 128 | 151 | |||||||||
| Proceeds from restricted stock | — | 25 | — | |||||||||
| Net other-than-temporary impairment losses | 4,238 | 1,761 | — | |||||||||
| Net gains on available-for-sale securities | (4,729 | ) | (655 | ) | (312 | ) | ||||||
| Net gains on sale of held-to-maturity securities | — | — | (588 | ) | ||||||||
| Net loss on premises and equipment | — | 51 | — | |||||||||
| Net loss on OREO | 905 | 26 | ||||||||||
| Life insurance death benefit | (136 | ) | (230 | ) | — | |||||||
| Increase in cash surrender value of bank owned life insurance | (1,020 | ) | (973 | ) | (893 | ) | ||||||
| Net amortization of securities | 793 | 90 | 162 | |||||||||
| Decrease in accrued interest receivable | 121 | 381 | 397 | |||||||||
| Increase in other assets | (7,319 | ) | (7,332 | ) | (2,055 | ) | ||||||
| Increase (decrease) in other liabilities | 54 | (4,432 | ) | 4,057 | ||||||||
| Net cash (used in) provided by operating activities | 3,622 | (704 | ) | 1,886 | ||||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from maturities of investment securities available-for-sale | 58,206 | 52,702 | 186,371 | |||||||||
| Proceeds from maturities, calls and paydowns of securities held to maturity | — | — | 9,206 | |||||||||
| Net purchases of restricted investment in bank stock | (442 | ) | (1,763 | ) | (662 | ) | ||||||
| Proceeds from sales of investment securities available-for-sale | 665,828 | 330,808 | 56,331 | |||||||||
| Proceeds from sales of investment securities held to maturity | — | — | 10,312 | |||||||||
| Purchase of securities available-for-sale | (785,044 | ) | (315,899 | ) | (204,238 | ) | ||||||
| Purchase of securities held to maturity | — | — | (2,000 | ) | ||||||||
| Net increase in loans | (40,490 | ) | (125,004 | ) | (1,402 | ) | ||||||
| Purchases of premises and equipment | (742 | ) | (2,882 | ) | (182 | ) | ||||||
| Purchase of bank-owned life insurance | (2,475 | ) | — | — | ||||||||
| Proceeds from life insurance death benefits | 266 | 526 | — | |||||||||
| Capital expenditure addition to OREO | (476 | ) | — | — | ||||||||
| Proceeds from sale of premises and equipment | 1 | 24 | — | |||||||||
| Proceeds from sale of branch facility | — | 2,414 | — | |||||||||
| Proceeds from sale of OREO | 3,520 | 452 | — | |||||||||
| Net cash (used in) provided by investing activities | (101,848 | ) | (58,622 | ) | 53,736 | |||||||
See the accompanying notes to the consolidated financial statements.
CENTER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)
| | | | |||||||||
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase (decrease) in deposits | 154,168 | (39,533 | ) | (27,701 | ) | |||||||
| Net increase (decrease) in short-term borrowings | 966 | (4,521 | ) | (8,325 | ) | |||||||
| Proceeds from long-term borrowings | — | 55,000 | 55,000 | |||||||||
| Payments on long-term borrowings | (153 | ) | (148 | ) | (35,000 | ) | ||||||
| Cash dividends on common stock | (3,166 | ) | (4,675 | ) | (4,885 | ) | ||||||
| Cash dividends on preferred stock | (425 | ) | — | — | ||||||||
| Issuance cost of common stock | (11 | ) | (19 | ) | (21 | ) | ||||||
| Proceeds from issuance of preferred stock and warrants | 10,000 | — | — | |||||||||
| Proceeds from issuance of shares from rights offering | 11,000 | — | — | |||||||||
| Tax (expense) benefit from stock based compensation | (73 | ) | (78 | ) | 155 | |||||||
| Proceeds from exercise of stock options | 57 | 224 | 850 | |||||||||
| Purchase of treasury stock | — | (1,924 | ) | (10,027 | ) | |||||||
| Net cash provided by (used in) financing activities | 172,363 | 4,326 | (29,954 | ) | ||||||||
| Net (decrease) increase in cash and cash equivalents | 74,137 | (55,000 | ) | 25,668 | ||||||||
| Cash and cash equivalents at beginning of year | 15,031 | 70,031 | 44,363 | |||||||||
| Cash and cash equivalents at end of year | $ | 89,168 | $ | 15,031 | $ | 70,031 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Noncash activities: | ||||||||||||
| Trade date accounting settlement for investments | $ | 1,979 | $ | 3,514 | $ | — | ||||||
| Transfer of loans to real estate owned | — | 3,949 | — | |||||||||
| Transfer of loan participation to other receivables | 5,054 | — | — | |||||||||
| Reclassification of held-to-maturity investment securities to available-for-sale | — | — | 113,413 | |||||||||
| Reclassification of office building from premises to other assets | — | — | 2,398 | |||||||||
| Cash paid during year for: | ||||||||||||
| Interest paid on deposits and borrowings | $ | 23,021 | $ | 23,615 | $ | 30,726 | ||||||
| Income taxes | 344 | 2,370 | 515 | |||||||||
See the accompanying notes to the consolidated financial statements.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Center Bancorp, Inc. (the “Parent Corporation”) are prepared on the accrual basis and include the accounts of the Parent Corporation and its wholly owned subsidiary, Union Center National Bank (the “Bank” and collectively with the Parent Corporation and the Parent Corporation’s other direct and indirect subsidiaries, the “Corporation”). All significant inter-company accounts and transactions have been eliminated from the accompanying consolidated financial statements.
Business
The Parent Corporation is a bank holding company whose principal activity is the ownership and management of Union Center National Bank as mentioned above. The Bank provides a full range of banking services to individual and corporate customers through branch locations in Union and Morris counties, New Jersey. Additionally, the Bank originates residential mortgage loans and services such loans for others. The Bank is subject to competition from other financial institutions and the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.
Use of Estimates
In preparing the consolidated financial statements, management is required to Tablemake estimates and assumptions that affect the reported amounts of Contents
Cash and Due From Banks
Cash and Due From Banks includes cash on hand and balances due from correspondent banks including the Federal Reserve Bank.
Investment Securities
The Corporation accounts for its investment securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-05 (previously SFAS No. 115, “Accounting for Certain Investment in Debt and Equity Securities”). Investments are classified into the following categories: (1) held to maturity securities, for which the Corporation has both the positive intent and ability to hold until maturity, which are reported at amortized cost; (2) trading securities, which are purchased and held principally for the purpose of selling in the near term and 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 and which management believes may be sold prior to maturity due to changes in interest rates, prepayment, risk, liquidity or other factors, and 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 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.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL REPORTINGSTATEMENTS
Note 1 — Summary of Significant Accounting Policies – (continued)
During the fourth quarter of 2007, the Corporation reclassified all of its held-to-maturity investment securities to available-for-sale. The transfer of these securities to available-for-sale allowed the Corporation greater flexibility in managing its investment portfolio. Investment securities with a total of $113.4 million and a fair value of $112.9 million were transferred to available-for-sale during the fourth quarter of 2007. The unrealized loss on these securities was recorded, net of tax, as accumulated other comprehensive income, an adjustment to stockholders’ equity.
Securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. In April 2009, the FASB issued FASB ASC 320-10-65 (previously SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Investments”), which was adopted as of June 30, 2009. The accounting standard clarifies the interaction of the factors that should be considered when determining whether a debt security is other–than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Prior to the June 30, 2009 adoption, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB ASC 320-10-65 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized through earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized through other comprehensive income. Impairment charges on certain investment securities of approximately $4.2 million and $1.8 million were recognized in earnings during the years ended December 31, 2009 and 2008, respectively. No impairment charges were recognized during the year ended December 31, 2007.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of costs or estimated fair value or fair value under the fair value option accounting guidance for financial instruments. For loans carried at the lower of cost or estimated fair value, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. At December 31, 2009 and 2008, the Corporation held no loans for sale.
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. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies – (continued)
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 using the level yield method.
Allowance for Loan Losses
The allowance for loan losses (“allowance”) is maintained at a level determined adequate to provide for probable 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 collectability 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. 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.
The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35 (previously SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures”). 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.
The Corporation has defined its population of impaired loans to include all non-accrual and troubled debt restructuring loans. As part of the evaluation, the Corporation reviews for impairment all non-homogeneous loans internally classified as substandard or below, in each instance above an established dollar threshold of $200,000, as well as all non-homogeneous loans greater than $1.0 million. Smaller impaired non-homogeneous loans and impaired homogeneous loans are not measured for specific reserves and are covered under the Corporation’s general reserve.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense.
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 a straight-line basis. Expenditures for maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Gains and
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies – (continued)
losses on sales or other dispositions are recorded as a component of other income or other expenses. In September 2007, the Corporation reclassified its Florham Park office building from premises to held for sale, which was included in other assets, and entered into a contract to sell that property. On February 29, 2008, the Corporation completed the sale of the property for $2.4 million, which approximated the carrying value.
Other Real Estate Owned
Other real estate owned (“OREO”), representing property acquired through foreclosure and held for sale, are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequently, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs relating to holding the assets are charged to expenses.
During the third quarter of 2009, the Corporation sold the residential condominium project in Union County, New Jersey, which was carried as OREO. At December 31, 2009, the Corporation had no OREO. The decrease from December 31, 2008 represented a writedown of $926,000 of the carrying value and subsequent sale of the project in the third quarter of 2009.
Mortgage Servicing
The Corporation performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received for those services. At December 31, 2009 and 2008, the Corporation was servicing approximately $7.6 million and $10.0 million, respectively, of loans for others.
The Corporation accounts for its servicing of financial assets in accordance with FASB ASC 860-50. The Corporation originates mortgages under plans to sell those loans and service the loans owned by the investor. The Corporation records mortgage servicing rights and the loans based on relative fair values at the date of sale. The balance of mortgage servicing rights at December 31, 2009 and 2008 are immaterial to the Corporation’s consolidated financial statements.
Employee Benefit Plans
The Corporation has a non-contributory pension plan covering all eligible employees up until September 30, 2007, at which time the Corporation froze its defined benefit pension plan. As such, all future benefit accruals in this pension plan were discontinued and all retirement benefits that employees would have earned as of September 30, 2007 were preserved. 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 other expense.
The Corporation accounts for its defined benefit pension plan in accordance with FASB ASC 715-30. FASB ASC 715-30 requires that the funded status of defined benefit postretirement plans be recognized on the Corporation’s statement of condition and changes in the funded status be reflected in other comprehensive income. FASB ASC 715-30 also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, effective for fiscal years ended after December 15, 2008. Early adoption was encouraged. The Corporation had early adopted this statement and the adoption did not have a material effect on the Corporation’s consolidated financial statements.
Stock-Based Compensation
Stock compensation accounting guidance (FASB ASC 718, “Compensation-Stock Compensation”) requires that the compensation cost related to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies – (continued)
Stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. See Note 16 of the Notes to Consolidated Financial Statements for a further discussion.
Earnings per Share
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, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In Thousands, Except per Share Amounts) | ||||||||||||
| Net income | $ | 4,573 | $ | 5,842 | $ | 3,856 | ||||||
| Preferred stock dividends and accretion | 567 | — | — | |||||||||
| Net income available to common stockholders | $ | 4,006 | $ | 5,842 | $ | 3,856 | ||||||
| Average number of common shares outstanding | 13,382 | 13,049 | 13,781 | |||||||||
| Effect of dilutive options | 3 | 12 | 60 | |||||||||
| Average number of common shares outstanding used to calculate diluted earnings per common share | 13,385 | 13,061 | 13,841 | |||||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 0.30 | $ | 0.45 | $ | 0.28 | ||||||
| Diluted | $ | 0.30 | $ | 0.45 | $ | 0.28 | ||||||
Treasury Stock
The Corporation announced on March 27, 2006 that its Board of Directors approved an increase in its then current share buyback program to 5 percent of outstanding shares, enhancing its then current authorization by 425,825 shares to 684,965 shares. The Corporation announced on October 1, 2007 that its Board of Directors approved an additional increase in its current share buyback program to 5 percent of outstanding shares, enhancing its current authorization by 684,627 shares. On June 26, 2008, the Corporation announced that its Board of Directors approved an additional buyback of 649,712 shares. The total buyback authorization has been increased to 2,039,731 shares. Subject to limitations applicable to the Corporation, purchases may be made from time to time as, in the opinion of management, market conditions warrant, in the open market or in privately negotiated transactions. Shares repurchased will be added to the corporate treasury and will be used for future stock dividends and other issuances. As of December 31, 2009, Center Bancorp had 14.6 million shares of common stock outstanding. As of December 31, 2009, the Corporation had purchased 1,386,863 common shares at an average cost per share of $11.44 under the stock buyback program as amended on October 1, 2007 and June 26, 2008. The repurchased shares were recorded as Treasury Stock, which resulted in a decrease in stockholders’ equity. Treasury stock is recorded using the cost method and accordingly is presented as a reduction of stockholders’ equity. For the year ended December 31, 2009, the Corporation did not purchase any of its shares.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies – (continued)
Goodwill
The Corporation adopted the provisions of FASB ASC 350-10 (previously SFAS No. 142, “Goodwill and Other Intangible Assets”), which requires that goodwill to be tested for impairment annually, or more frequently if impairment indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2009, 2008 and 2007.
Comprehensive Income
Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Corporation’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale and unrecognized actuarial gains and losses of the Corporation’s defined benefit pension plan, net of taxes.
Disclosure of comprehensive income for the years ended December 31, 2009, 2008 and 2007 is presented in the Consolidated Statements of Changes in Stockholders’ Equity and presented in detail in Note 14 of the Notes to Consolidated Financial Statements.
Bank-Owned Life Insurance
During 2001, the Corporation invested $12.5 million in Bank-Owned Life Insurance (“BOLI”) to help offset the rising cost of employee benefits, and made subsequent investments in 2004 of $2.5 million and in 2006 of $2.0 million. During 2009, the Corporation invested $2.5 million in additional BOLI policies. The change in the cash surrender value of the BOLI was recorded as a component of other income and amounted to $1,020,000, $973,000 and $893,000 in 2009, 2008 and 2007, respectively. During 2009 and 2008, the Corporation recognized $136,000 and $230,000, respectively, in tax-free proceeds in excess of contract value on its BOLI due to the death of insured participants.
Income Taxes
The Corporation recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of assets and liabilities, using enacted tax rates expected to be applied to taxable income in the years in which the differences are expected to be settled. Income tax-related interest and penalties are classified as a component of income tax expense.
Advertising Costs
The Corporation recognizes its marketing and advertising cost as incurred. Advertising costs were $366,000, $637,000 and $603,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Reclassifications
Certain reclassifications have been made in the consolidated financial statements for 2008 and 2007 to conform to the classifications presented in 2009.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Recent Accounting Pronouncements
On June 29, 2009, the FASB issued FASB ASC 105-10-65 (previously SFAS No. 168, “Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162”(“Codification”)). This Codification is the sole source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. The Corporation adopted the Codification for the quarterly period ended. September 30, 2009, as required, and there was not a material impact on the Corporation’s financial statements taken as a whole. In order to ease the transition to the Codification, the Corporation has provided the Codification cross-reference along side the references to the standards issued and adopted prior to the adoption of the Codification.
In April 2009, the FASB issued three amendments to the fair value measurement, disclosure and other-than-temporary impairment standards:
FASB ASC 820-10-05 (previously SFAS No. 157, “Fair Value Measurements”) defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FASB ASC 820-10-05 provides additional guidance on identifying circumstances when a transaction may not be considered orderly.
FASB ASC 820-10-65 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with FASB ASC 820-10-05.
FASB ASC 820-10-65 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of evidence to determine whether the transaction is orderly. It also provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
FASB ASC 320-10-65 amends other-than-temporary impairment guidance for debt securities and expands disclosure requirements for other-than-temporarily impaired debt and equity securities. FASB ASC 320-10-65 requires companies to record other-than-temporary impairment charges, through earnings, if they have the intent to sell, or will more likely than not be required to sell, an impaired debt security before a recovery of its amortized cost basis. In addition, FASB ASC 320-10-65 requires companies to record other-than-temporary impairment charges through earnings for the amount of credit losses, regardless of the intent or requirement to sell. Credit loss is measured as the difference between the present value of an impaired debt security’s cash flows and its amortized cost basis. Non-credit related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as a company has no intent or requirement to sell an
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Recent Accounting Pronouncements – (continued)
impaired security before a recovery of amortized cost basis. Finally, FASB 320-10-65 requires companies to record all previously recorded non-credit related other-than-temporary impairment charges for debt securities as cumulative effect adjustments to retained earnings as of the beginning of the period of adoption.
FASB ASC 825-10-65 (previously SFAS No. 107-1 and APB 28-1) requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FASB ASC 825-10 also requires those disclosures in summarized financial information at interim reporting periods.
All three FASB ASC’s discussed herein include substantial additional disclosure requirements. The effective date for these new ASC’s is the same: interim and annual reporting periods ended after June 15, 2009. The Corporation adopted these ASC’s at June 30, 2009 and there was not a material impact on its consolidated financial statements.
On May 28, 2009, the FASB issued FASB ASC 855-10 (previously SFAS No. 165, “Subsequent Events”). Under FASB ASC 855-10-05, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. FASB ASC 855-10-05 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. FASB ASC 855-10 also requires entities to disclose the date through which subsequent events have been evaluated. FASB ASC 855-10 was effective for interim and annual reporting periods ending after June 15, 2009. The Corporation adopted the provisions of FASB ASC 855-10-05 for the quarter ended June 30, 2009. The adoption of this accounting standard had no material impact on the Corporation’s consolidated financial statements.
On June 12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“FAS 166”), which was incorporated into ASC 860 “Transfers and Servicing”, and SFAS No.167, “Amendments to FASB Interpretation No. 46(Revised), which was incorporated into ASC 810 “Consolidation” (“FAS 167”), which change the way entities account for securitizations and special-purpose entities.
FAS 166 is a revision to FASB ASC 860-10 (previously SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”) and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. FAS 166 also eliminates the concept of a “qualifying special-purpose entity”, changes the requirements for derecognizing financial assets and requires additional disclosures.
FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.
Both FAS 166 and FAS 167 will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of FAS 166 shall be applied to transfers that occur on or after the effective date. The Corporation will adopt both FAS 166 and FAS 167 on January 1, 2010, as required. The Corporation is currently assessing the impact this adoption may have on the Corporation’s consolidated financial statements.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Recent Accounting Pronouncements – (continued)
In November 2008, the SEC released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its consolidated financial statements, and it will continue to monitor the development of the potential implementation of IFRS.
In December 2008, the FASB issued FASB ASC 715-20-65-2 (previously FSP FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”). This ASC amends FASB ASC 715-20-65-2 (previously SFAS 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”) to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this ASC shall be provided for fiscal years ending after December 15, 2009. The Corporation has adopted this standard and the adoption had no material impact on the Corporation’s consolidated financial statements.
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 $4,050,000 and $2,900,000 at December 31, 2009 and 2008, respectively.
Note 4 — Investment Securities
The following tables present information related to the Corporation’s portfolio of securities available-for-sale at December 31, 2009 and 2008.
| | | | | | |||||||||||||||
| December 31, 2009 | ||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||
| Non-Credit OTTI | Other | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Securities Available-for-Sale: | ||||||||||||||||||||
| U.S. Treasury and agency securities | $ | 2,089 | $ | — | $ | — | $ | — | $ | 2,089 | ||||||||||
| Federal agency obligations | 216,640 | 592 | — | (2,647 | ) | 214,585 | ||||||||||||||
| Obligations of U.S. states and political subdivisions | 19,688 | 77 | — | (484 | ) | 19,281 | ||||||||||||||
| Trust preferred securities | 34,404 | 113 | (2,457 | ) | (5,345 | ) | 26,715 | |||||||||||||
| Other debt securities | 33,317 | 76 | (2,371 | ) | (1,101 | ) | 29,921 | |||||||||||||
| Equity securities | 5,936 | 42 | — | (445 | ) | 5,533 | ||||||||||||||
| Total | $ | 312,074 | $ | 900 | $ | (4,828 | ) | $ | (10,022 | ) | $ | 298,124 | ||||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities – (continued)
| | | | | ||||||||||||
| December 31, 2008 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Securities Available-for-Sale: | ||||||||||||||||
| U.S. Treasury and agency securities | $ | 100 | $ | — | $ | — | $ | 100 | ||||||||
| Federal agency obligations | 81,919 | 1,087 | (209 | ) | 82,797 | |||||||||||
| Obligations of U.S. states and political subdivisions | 51,926 | 436 | (268 | ) | 52,094 | |||||||||||
| Trust preferred securities | 39,050 | — | (7,279 | ) | 31,771 | |||||||||||
| Other debt securities | 63,104 | 82 | (3,824 | ) | 59,362 | |||||||||||
| Equity securities | 17,247 | — | (657 | ) | 16,590 | |||||||||||
| Total | $ | 253,346 | $ | 1,605 | $ | (12,237 | ) | $ | 242,714 | |||||||
All of the Corporation’s investment securities are classified as available-for-sale at December 31, 2009 and 2008. The available-for-sale securities are reported at fair value with unrealized gains or losses included in equity, net of taxes. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 18 of the Notes to Consolidated Financial Statements for a further discussion.
The following table presents information for investments in securities available-for-sale at December 31, 2009, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.
| | | ||||||
| Available-for-Sale | ||||||||
| Amortized Cost | Estimated Fair Value | |||||||
| (Dollars in Thousands) | ||||||||
| Due in one year or less | $ | 1,852 | $ | 1,857 | ||||
| Due after one year through five years | 7,103 | 6,232 | ||||||
| Due after five years through ten years | 52,655 | 51,350 | ||||||
| Due after ten years | 244,528 | 233,153 | ||||||
| Equity securities | 5,936 | 5,532 | ||||||
| Total investment securities | $ | 312,074 | $ | 298,124 | ||||
During 2009, securities sold from the Corporation’s available-for-sale portfolio amounted to approximately $665.8 million. The gross realized gains on securities sold amounted to approximately $5,897,000, while the gross realized losses amounted to approximately $1,168,000 in 2009. During 2009, the Corporation recorded a $140,000 other-than-temporary impairment charge on its Lehman Brothers corporate bond, $3,433,000 on two pooled trust preferred securities, $188,000 on three variable rate private label CMOs, $364,000 on charge to earnings relating to the court ordered liquidation of the Reserve Primary Fund, and $113,000 of write-downs relating to one equity holding in bank stocks. During 2008, securities sold from the Corporation’s available-for-sale portfolio amounted to approximately $330.8 million. The gross realized gains on securities sold amounted to approximately $818,000, while the gross realized losses amounted to approximately $163,000 in 2008. During 2008, the Corporation incurred a $1.3 million charge relating to a Lehman Brothers corporate bond and $461,000 of write-downs relating to three equity holdings in bank stocks.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities – (continued)
Other-than-Temporarily Impaired Investments
Summary of Other-than-Temporary Impairment Charges
| | | ||||||
| Years Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Equity securities | $ | 113 | $ | 461 | ||||
| Debt securities | 4,125 | 1,300 | ||||||
| Total other-than-temporary impairment charges | $ | 4,238 | $ | 1,761 | ||||
The Corporation performs regular analysis on the available-for-sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record other-than-temporary impairment (“OTTI”) charges, through earnings, if they have the intent to sell, or more likely than not be required to sell, an impaired debt security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the Corporation does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other than temporary, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
The Corporation reviews all securities for potential recognition of other-than-temporary impairment. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could include credit rating downgrades.
The Corporation’s assessment of whether an investment in the portfolio of assets is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities – (continued)
The following table presents detailed information for each trust preferred security held by the Corporation which has at least one rating below investment grade.
| | | | | | | | | | |||||||||||||||||||||||||||
| | | | | | | | | | |||||||||||||||||||||||||||
| Deal Name | Single Issuer or Pooled | Class/ Tranche | Book Value | Estimated Fair Value | Gross Unrealized Gain (Loss) | Lowest Credit Rating Assigned | Number of Banks Currently Performing | Deferrals and Defaults as % of Original Collateral | Expected Deferral/Defaults as % of Remaining Performing Collateral | |||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
| Countrywide Capital IV | Single | — | $ | 1,769 | $ | 1,519 | $ | (250 | ) | BB | 1 | None | None | |||||||||||||||||||||||
| Countrywide Capital V | Single | — | 2,747 | 2,366 | (381 | ) | BB | 1 | None | None | ||||||||||||||||||||||||||
| Countrywide Capital V | Single | — | 250 | 215 | (35 | ) | BB | 1 | None | None | ||||||||||||||||||||||||||
| NPB Capital Trust II | Single | — | 898 | 754 | (144 | ) | NR | 1 | None | None | ||||||||||||||||||||||||||
| Citigroup Cap IX | Single | — | 991 | 736 | (255 | ) | B+ | 1 | None | None | ||||||||||||||||||||||||||
| Citigroup Cap IX | Single | — | 1,901 | 1,420 | (481 | ) | B+ | 1 | None | None | ||||||||||||||||||||||||||
| Citigroup Cap XI | Single | — | 245 | 184 | (61 | ) | B+ | 1 | None | None | ||||||||||||||||||||||||||
| IBC Cap Fin II | Single | — | 667 | 333 | (334 | ) | NR | 1 | None | None | ||||||||||||||||||||||||||
| BFC Capital Trust | Single | — | 1,348 | 1,461 | 113 | NR | 1 | None | None | |||||||||||||||||||||||||||
| BAC Capital Trust X | Single | — | 2,496 | 2,004 | (492 | ) | BB | 1 | None | None | ||||||||||||||||||||||||||
| Nationsbank Cap Trust III | Single | — | 1,568 | 1,095 | (473 | ) | BB | 1 | None | None | ||||||||||||||||||||||||||
| Bank of Florida Junior Sub Debt | Single | — | 3,000 | 2,100 | (900 | ) | NR | 1 | None | None | ||||||||||||||||||||||||||
| ALESCO Preferred Funding VI | Pooled | C2 | 665 | 34 | (631 | ) | Ca | 68 | 31.4 | % | 62.4 | % | ||||||||||||||||||||||||
| ALESCO Preferred Funding VII | Pooled | C1 | 2,041 | 215 | (1,826 | ) | Ca | 69 | 22.9 | % | 53.2 | % | ||||||||||||||||||||||||
At December 31, 2009, excess subordination as a percentage of remaining performing collateral for the ALESCO Preferred Funding VI and VII investments were -31.1 percent and -21.0 percent, respectively. Excess subordination is the amount of performing collateral above the amount of outstanding collateral underlying each class of the security. The Excess Subordination as a Percent of Remaining Performing Collateral reflects the difference between the performing collateral and the collateral underlying each security divided by the performing collateral. A negative number results when the paying collateral is less than the collateral underlying each class of the security. A low or negative number decreases the likelihood of full repayment of principal and interest accordingly to original contractual terms.
The Corporation owns two pooled trust preferred securities (“Pooled TRUPS”), which consists of securities issued by financial institutions and insurances companies and the Corporation holds the mezzanine tranche of such securities. Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches. Our analysis of these Pooled TRUPS falls within the scope of EITF 99-20 and uses a discounted cash flow model to determine the total OTTI loss. The model
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities – (continued)
considers the structure and term and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers and the allocation of the payments to the note classes according to a priority of payments specified in the offering circular and indenture. The current estimate of expected cash flows is based on the most recent trustee reports and other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include defaults rates, default rate timing profile and recovery rates. We assume no prepayments as these Pooled TRUPS were issued at comparatively tight spreads and as such, there is little incentive if any to prepay.
One of the Pooled TRUPS has incurred its third interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded a $1.060 million other-than-temporary impairment charge for the three months ended December 31, 2009 and $2.460 million for the twelve months ended December 31, 2009, which represents 79.7 percent of the par amount of $3.1 million. The new cost basis for this security has been written down to $665,000. The other Pooled TRUP incurred its first interruption of cash flow payment in the fourth quarter of 2009. Management determined that an other-than-temporary impairment exists on this security as well and recorded a $973,000 charge during the fourth quarter of 2009, which represents 32.3 percent of the par amount of $3.0 million. The new cost basis for this security has been written down to $2.0 million.
During the first quarter of 2009, the Corporation recorded a $140,000 other-than-temporary impairment charge on its Lehman Brothers bond holding. Through June 30, 2009, other-than-temporary impairment charges taken on this bond amounted to $1,440,000. As part of the Corporation’s tax strategies, management elected to sell the Lehman bond holding during the third quarter of 2009.
Credit Loss Portion of OTTI Recognized in Earning on Debt Securities
| | |||
| (Dollars in Thousands) | ||||
| Balance of credit-related OTTI at January 1, 2009 | $ | — | ||
| Addition: | ||||
| Credit losses for which other-than-temporary impairment was not previously recognized | 3,761 | |||
| Reduction: | ||||
| Credit losses for securities sold during the period | (140 | ) | ||
| Balance of credit-related OTTI at December 31, 2009 | $ | 3,621 | ||
The Corporation owns three variable rate private label collateralized mortgage obligations (CMOs), which were also evaluated for impairment. The Variable Rate Collateralized Mortgage Obligations were originally issued in 2006 and are 30 year Adjustable Rate Mortgage loans secured by a first lien, fully amortizing one-to-four residential mortgage loans. The tranche purchased was a Super Senior with an original credit rating of AAA/AAA. The top five states geographic concentration comprised in the deal were California 18.2 percent, Arizona 10.5 percent, Virginia 6.1 percent, Florida 6.5 percent and Nevada 6.3 percent. No one state exceeded a 25 percent concentration. These states have been heavily impacted by the financial crises and as such have sustained heavy delinquencies affecting the credit rating of the security. Management had applied aggressive default rates to identify if any credit impairment exists, as these bonds were downgraded to below investment grade. These bonds are currently paying with no interruption of cash flow. As such, management determined that an other-than-temporary impairment charge exists and recorded a $188,000 writedown to the bonds, which represents 3.4 percent of the par amount of $5.6 million. The new cost basis for these securities has been written down to $5.4 million.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities – (continued)
During 2009, the Corporation recorded $113,000 of other-than-temporary impairment charges relating to one equity holding in bank stocks. Due to the deterioration in the bank’s financial condition and that near term prospects in market value recovery appear remote, management determined that the expectation to recover its cost is not temporary. As such, this equity was written down to fair market value at the time of evaluation, which was December 31, 2009.
The Corporation’s investment portfolio also consists of overnight investments that were made into the Reserve Primary Fund (the “Fund”), a money market fund registered with the Securities and Exchange Commission as an investment company under the Investment Company Act of 1940. On September 22, 2008, the Fund announced that redemptions of shares of the Fund were suspended pursuant to an SEC order so that an orderly liquidation could be effected for the protection of the Fund’s investors. Through December 31, 2009, the Corporation has received five distributions from the Fund, totaling approximately 92 percent of its outstanding balance, leaving a remaining outstanding balance in the Fund of $2.943 million. On January 29, 2010, as part of the court order liquidation of the Fund, the Corporation received a sixth distribution or $2.446 million, bringing total distributions to date to approximately 99 percent. During the fourth quarter of 2009, the Corporation recorded a $364,000, or approximately 1 percent, other-than-temporary impairment charge to earnings relating to this court order liquidation of the Fund. The Corporation’s outstanding carrying balance in the Fund as of January 31, 2010 totaled $133,000.
During the third quarter of 2008, the Corporation recognized a $1.2 million other-than-temporary impairment charge on a Lehman Brothers corporate bond as a result of Lehman Brothers’ September bankruptcy filing. The Corporation deemed it prudent to mark the security down to what the Corporation believes it would receive from the bankruptcy proceedings as opposed to an attempted sale into an illiquid market. During the fourth quarter, the Corporation took an additional impairment charge of $100,000 on the same bond. The Corporation filed its claims under the Bankruptcy and received notification that Lehman will be afforded a longer time for liquidation than originally announced in order to maximize value returns on the sold assets. Management will continue to monitor the liquidation process, re-test values during that period and adjust carrying value if necessary.
During 2008, the Corporation recorded $461,000 of other-than-temporary impairment charges relating to three equity holdings in bank stocks. These equities were written down to fair value.
Temporarily Impaired Investments
For all other securities, the Corporation does not believe that the unrealized losses, which were comprised of eighty investment securities as of December 31, 2009, represent an other-than-temporary impairment. The gross unrealized losses associated with U.S. Treasury and Agency securities and Federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.
Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’s investment in any one issuer or industry. The Corporation has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Corporation believes the investment portfolio is prudently diversified.
The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities ��– (continued)
The Corporation evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the mortgage-backed securities category consist primarily of U.S. agency and private issue collateralized mortgage obligations. Unrealized losses in the corporate debt securities category consist of single name corporate trust preferred securities, pooled trust preferred securities and corporate debt securities issued by large financial institutions. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. For collateralized mortgage obligations, management reviewed expected cash flows and credit support to determine if it was probable that all principal and interest would be repaid. None of the corporate issuers have defaulted on interest payments. Management concluded that these securities, other than the previously mentioned two Pooled TRUPS, two private label CMOs, one equity holding and its investment in the Primary Reserve Funds, were not other-than-temporarily impaired at December 31, 2009. Future deterioration in the cash flow on collateralized mortgage obligations or the credit quality of these large financial institution issuers of corporate debt securities could result in impairment charges in the future.
In determining that the securities giving rise to the previously mentioned unrealized losses were not other than temporary, the Corporation evaluated the factors cited above, which the Corporation considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Corporation must exercise considerable judgment. Accordingly there can be no assurance that the actual results will not differ from the Corporation’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material affect on the Corporation’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security is subject to numerous risks as cited above.
The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at December 31, 2009 and December 31, 2008:
| | | | | | | ||||||||||||||||||
| December 31, 2009 | ||||||||||||||||||||||||
| Total | Less Than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Available-for-Sale: | ||||||||||||||||||||||||
| Federal Agency Obligations | $ | 120,504 | $ | (2,647 | ) | $ | 120,402 | $ | (2,646 | ) | $ | 102 | $ | (1 | ) | |||||||||
| Obligations of U.S. states and political subdivisions | 7,181 | (484 | ) | 6,297 | (458 | ) | 884 | (26 | ) | |||||||||||||||
| Trust preferred securities | 25,253 | (7,802 | ) | 3,717 | (1,234 | ) | 21,536 | (6,568 | ) | |||||||||||||||
| Other debt securities | 22,815 | (3,472 | ) | 11,864 | (55 | ) | 10,951 | (3,417 | ) | |||||||||||||||
| Equity securities | 1,317 | (445 | ) | — | — | 1,317 | (445 | ) | ||||||||||||||||
| Total temporarily impaired securities | $ | 177,070 | $ | (14,850 | ) | $ | 142,280 | $ | (4,393 | ) | $ | 34,790 | $ | (10,457 | ) | |||||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Investment Securities – (continued)
| | | | | | | ||||||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||
| Total | Less than 12 Months | 12 Months or Longer | ||||||||||||||||||||||
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Available-for-Sale: | ||||||||||||||||||||||||
| Federal Agency Obligations | $ | 16,118 | $ | (209 | ) | $ | 2,477 | $ | (1 | ) | $ | 13,641 | $ | (208 | ) | |||||||||
| Obligations of U.S. states and political subdivisions | 9,542 | (268 | ) | 8,740 | (155 | ) | 802 | (113 | ) | |||||||||||||||
| Trust preferred securities | 28,103 | (7,279 | ) | 1,485 | (16 | ) | 26,618 | (7,263 | ) | |||||||||||||||
| Other debt securities | 48,208 | (3,824 | ) | 16,358 | (1,540 | ) | 31,850 | (2,284 | ) | |||||||||||||||
| Equity securities | 500 | (657 | ) | — | — | 500 | (657 | ) | ||||||||||||||||
| Total temporarily impaired securities | $ | 102,471 | $ | (12,237 | ) | $ | 29,060 | $ | (1,712 | ) | $ | 73,411 | $ | (10,525 | ) | |||||||||
Investment securities having a carrying value of approximately $185.9 million and $149.8 million at December 31, 2009 and 2008, respectively, were pledged to secure public deposits, short-term borrowings, and FHLB advances and for other purposes required or permitted by law.
Note 5 — Loans and the Allowance for Loan Losses
The following table sets forth the composition of the Corporation’s loan portfolio, net of deferred fees and costs, at December 31, 2009 and 2008, respectively:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Real estate – residential mortgage | $ | 191,199 | $ | 240,885 | ||||
| Real estate – commercial | 405,903 | 358,394 | ||||||
| Commercial and industrial | 117,912 | 75,415 | ||||||
| Installment | 439 | 1,509 | ||||||
| Total loans | $ | 715,453 | $ | 676,203 | ||||
Included in the loan balances above are net deferred loan costs of $391,000 and $572,000 at December 31, 2009 and 2008, respectively.
At December 31, 2009 and 2008, loans to officers and directors aggregated approximately $9,006,000 and $3,893,000, respectively. During the year ended December 31, 2009, the Corporation made new loans to officers and directors in the amount of $6,075,000; payments by such persons during 2009 aggregated $962,000.
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.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Loans and the Allowance for Loan Losses – (continued)
A summary of the activity in the allowance for loan losses is as follows:
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Balance at the beginning of year | $ | 6,254 | $ | 5,163 | $ | 4,960 | ||||||
| Provision for loan losses | 3,261 | 1,561 | 350 | |||||||||
| Loans charged-off | (2,152 | ) | (499 | ) | (156 | ) | ||||||
| Recoveries on loans previously charged-off | 912 | 29 | 9 | |||||||||
| Balance at the end of year | $ | 8,275 | $ | 6,254 | $ | 5,163 | ||||||
The amount of interest income that would have been recorded on non-accrual loans in 2009, 2008 and 2007 had payments remained in accordance with the original contractual terms was $276,000, $37,000 and $160,000, respectively.
At December 31, 2009, total impaired loans were approximately $8,058,000 as compared to $634,000 at December 31, 2008. The amount of related valuation allowances was $662,000 at December 31, 2009 and none at December 31, 2008. Impaired loans with a specific reserve of $662,000 amounted to $3,639,000 while $4,419,000 of impaired loans had no specific reserves. The Corporation’s total average impaired loans were $6,249,000 during 2009, $525,000 during 2008, and $1,548,000 during 2007.
At December 31, 2009, 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 policy of the Corporation is to generally grant commercial, mortgage and installment loans to New Jersey residents and businesses within its market 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 control of the Corporation. The Corporation is therefore subject to risk of loss. The Corporation 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.
During the fourth quarter of 2009 the Corporation took steps to terminate a participation agreement with another New Jersey bank, as the participation ended on December 31, 2009. Accordingly the Corporation reclassified the outstanding loan of $5.1 million into other assets on its balance sheet.
Note 6 — Premises and Equipment
Premises and equipment are summarized as follows:
| | | | |||||||||
| Estimated Useful Life (Years) | 2009 | 2008 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Land | $ | 3,447 | $ | 3,447 | ||||||||
| Buildings | 5 – 40 | 16,200 | 16,182 | |||||||||
| Furniture, fixtures and equipment | 2 – 20 | 16,222 | 15,933 | |||||||||
| Leasehold improvements | 5 – 30 | 1,839 | 1,735 | |||||||||
| Subtotal | 37,708 | 37,297 | ||||||||||
| Less: accumulated depreciation and amortization | 19,848 | 18,809 | ||||||||||
| Total premises and equipment, net | $ | 17,860 | $ | 18,488 | ||||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Premises and Equipment – (continued)
Depreciation and amortization expense of premises and equipment for the three years ended December 31, 2009 amounted to $1,369,000 in 2009, $1,738,000 in 2008 and $1,592,000 in 2007, respectively.
Note 7 — Goodwill and Other Intangible Assets
Goodwill
Goodwill allocated to the Corporation as of December 31, 2009 and 2008 was $16,804,000. There were no changes in the carrying amount of goodwill during the fiscal years ended December 31, 2009 and 2008.
The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the noted periods ended.
| | | | |||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| As of December 31, 2009: | ||||||||||||
| Core deposits | $ | 703 | $ | (479 | ) | $ | 224 | |||||
| Total intangible assets | 703 | (479 | ) | 224 | ||||||||
| As of December 31, 2008: | ||||||||||||
| Core deposits | $ | 703 | $ | (397 | ) | $ | 306 | |||||
| Total intangible assets | 703 | (397 | ) | 306 | ||||||||
| As of December 31, 2007: | ||||||||||||
| Core deposits | $ | 703 | $ | (303 | ) | $ | 400 | |||||
| Total intangible assets | $ | 703 | $ | (303 | ) | $ | 400 | |||||
The current year and estimated future amortization expense for amortized intangible assets was $82,000 for 2009 and $69,000, $56,000, $44,000, $31,000 and $18,000, respectively, for the subsequent five-year periods of 2010, 2011, 2012, 2013 and 2014.
Note 8 — Deposits
The table below provides information regarding the aggregate amount and maturity of time certificates of deposit of $100,000 or more as of December 31, 2009.
| | |||
| Amount | ||||
| (Dollars in Thousands) | ||||
| Due in one year or less | $ | 141,827 | ||
| Due in 2011 | 2,119 | |||
| Due in 2012 | 753 | |||
| Due in 2013 | 103 | |||
| Total certificates of deposit $100 or more | $ | 144,802 | ||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Borrowed Funds
Short-term borrowings at December 31, 2009 and 2008 consisted of the following:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Securities sold under agreements to repurchase | $ | 46,109 | $ | 30,143 | ||||
| Federal funds purchased and FHLB short-term advances | — | 15,000 | ||||||
| Total short-term borrowings | $ | 46,109 | $ | 45,143 | ||||
The weighted average interest rate for short-term borrowings at December 31, 2009 and 2008 was 1.38 percent and 1.51 percent, respectively.
Long-term borrowings at December 31, 2009 and 2008 consisted of the following:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| FHLB long-term advances | $ | 170,144 | $ | 170,297 | ||||
| Securities sold under agreements to repurchase | 53,000 | 53,000 | ||||||
| Total long-term borrowings | $ | 223,144 | $ | 223,297 | ||||
Securities sold under agreements to repurchase had average balances of $87.9 million and $94.9 million for the years ended December 31, 2009 and 2008, respectively. The maximum amount outstanding at any month end during 2009 and 2008 was $111.5 million and $106.0 million, respectively. The average interest rate paid on securities sold under agreements to repurchase were 3.52 percent and 3.70 percent for the years ended December 31, 2009 and 2008, respectively. Overnight federal funds purchased averaged $0.5 million during 2009 as compared to $14.1 million during 2008.
The weighted average interest rates on long term borrowings at December 31, 2009 and 2008 were 4.36 percent and 4.34 percent, respectively. The maximum amount outstanding at any month-end during 2009 and 2008 was $223.3 million and $223.3 million, respectively. The average interest rates paid on Federal Home Loan Bank advances were 4.09 percent and 4.18 percent for the years ended December 31, 2009 and 2008, respectively.
At December 31, 2009 and 2008, advances from the Federal Home Loan Bank of New York (“FHLB”) amounted to $170.1 million and $170.3 million, respectively. The FHLB advances had a weighted average interest rate of 4.09 percent and 4.09 percent at December 31, 2009 and 2008, respectively. These advances are secured by pledges of FHLB stock, 1–4 family residential mortgages, commercial real estate mortgages and U.S. Government and Federal Agency obligations. The advances are subject to quarterly call provisions at the discretion of the FHLB and at December 31, 2009 and 2008, are contractually scheduled for repayment as follows:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| 2010 | $ | 40,144 | $ | 40,297 | ||||
| 2011 | 10,000 | 10,000 | ||||||
| 2013 | 5,000 | 5,000 | ||||||
| 2016 | 20,000 | 20,000 | ||||||
| 2017 | 55,000 | 55,000 | ||||||
| 2018 | 40,000 | 40,000 | ||||||
| Total | $ | 170,144 | $ | 170,297 | ||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Borrowed Funds – (continued)
The securities sold under repurchase agreements to other counterparties included in long-term debt totaled $53.0 million at December 31, 2009 and $53.0 million at December 31, 2008. The weighted average rate at December 31, 2009 and 2008 was 5.23 percent and 4.54 percent, respectively. The schedule for contractual repayment is as follows:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| 2011 | $ | 12,000 | $ | 12,000 | ||||
| 2015 | 10,000 | 10,000 | ||||||
| 2017 | 15,000 | 15,000 | ||||||
| 2018 | 16,000 | 16,000 | ||||||
| Total | $ | 53,000 | $ | 53,000 | ||||
Note 10 — Subordinated Debentures
During 2003, the Corporation formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Corporation; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with FASB ASC 810-10 (previously FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities”). Distributions on the subordinated debentures owned by the subsidiary trusts below have been classified as interest expense in the Consolidated Statements of Income.
The following table summarizes the mandatory redeemable trust preferred securities of the Corporation’s Statutory Trust II at December 31, 2009.
| | | | | | |||||||||||||||
| Issuance Date | Securities Issued | Liquidation Value | Coupon Rate | Maturity | Redeemable by Issuer Beginning | |||||||||||||||
| 12/19/03 | $ | 5,000,000 | $ | 1,000 per Capital Security | Floating 3-month LIBOR + 285 Basis Points | 01/23/2034 | 01/23/2009 | |||||||||||||
Note 11 — Income Taxes
The current and deferred amounts of income tax expense (benefit) for the years ended December 31, 2009, 2008 and 2007, respectively, are as follows:
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | (19 | ) | $ | 104 | $ | 1,693 | |||||
| State | 146 | 242 | 313 | |||||||||
| Subtotal | 127 | 346 | 2,006 | |||||||||
| Deferred: | ||||||||||||
| Federal | 1,238 | 1,184 | (3,731 | ) | ||||||||
| State | 115 | 37 | (1,208 | ) | ||||||||
| Subtotal | 1,353 | 1,221 | (4,939 | ) | ||||||||
| Income tax expense (benefit) | $ | 1,480 | $ | 1,567 | $ | (2,933 | ) | |||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Income Taxes – (continued)
During the fourth quarter of 2006, the Corporation effected an internal entity structure reorganization of its subsidiary companies to streamline and consolidate the various subsidiary companies. We simplified our structure by reducing the number of operating subsidiary entities. Plans of liquidation were adopted and affected for 2006 and this resulted in a $2.6 million federal tax benefit of which $1.4 million is reflected in the 2006 current net tax benefit. The liquidation was completed in November of 2007 and as a result for the year ended December 31, 2007, the Corporation recognized an additional $2.4 million federal tax benefit of which $1.3 million is reflected in the 2007 current net tax benefit.
Reconciliation between the amount of reported income tax expense and the amount computed by applying the statutory Federal income tax rate is as follows:
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Income before income tax expense | $ | 6,053 | $ | 7,409 | $ | 923 | ||||||
| Federal statutory rate | 34 | % | 34 | % | 34 | % | ||||||
| Computed “expected” Federal income tax expense | 2,058 | 2,519 | 314 | |||||||||
| State tax, net of Federal tax benefit | 173 | 184 | (591 | ) | ||||||||
| Bank owned life insurance | (393 | ) | (409 | ) | (313 | ) | ||||||
| Tax-exempt interest and dividends | (334 | ) | (798 | ) | (1,080 | ) | ||||||
| Internal entity reorganization of subsidiaries | — | — | (1,285 | ) | ||||||||
| Other, net | (24 | ) | 71 | 22 | ||||||||
| Income tax expense (benefit) | $ | 1,480 | $ | 1,567 | $ | (2,933 | ) | |||||
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at December 31, 2009 and 2008 are presented below:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Impaired assets | $ | 1,661 | $ | 676 | ||||
| Allowance for loan losses | 3,121 | 2,314 | ||||||
| Employee benefit plans | 54 | 165 | ||||||
| Unrealized loss on securities available-for-sale and tax benefits related to adoption of FASB ASC 715-10 (previously known as FASB No 158) | 7,088 | 5,800 | ||||||
| Other | 507 | 406 | ||||||
| Federal NOL and AMT Credits | 4,471 | 7,426 | ||||||
| NJ NOL and AMA credits | 1,813 | 2,152 | ||||||
| Total deferred tax assets | $ | 18,715 | $ | 18,939 | ||||
| Deferred tax liabilities: | ||||||||
| Depreciation | $ | 243 | $ | 235 | ||||
| Market discount accretion | 61 | 108 | ||||||
| Deferred loan costs, net of fees | 502 | 581 | ||||||
| Purchase accounting | 89 | 130 | ||||||
| Total deferred tax liabilities | 895 | 1,054 | ||||||
| Net deferred tax asset | $ | 17,820 | $ | 17,885 | ||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Income Taxes – (continued)
Based on the Corporation’s historical and current taxable income and the projected future taxable income, 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, 2009 and 2008, respectively.
At December 31, 2009, the Corporation has federal income tax loss carry forwards of approximately $7.1 million, which have expirations beginning in the year 2020 and has state income tax loss carry forwards of approximately $26.9 million, which have expirations beginning in the year 2011.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependant upon the generation of future taxable income during periods in which those temporary differences become deductible, Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income, and tax planning strategies in making this assessment. During 2009 and 2008, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Corporation believes the net deferred tax assets are more likely than not to be realized.
The Corporation’s federal income tax returns are open and subject to examination from the 2006 tax return year and forward. The Corporation’s state income tax returns are generally open from the 2006 and later tax return years based on individual state statute of limitations.
Note 12 — Commitments, Contingencies and Concentrations of Credit Risk
In the normal course of business, the Corporation has outstanding commitments and contingent liabilities, such as standby and commercial letters of credit, unused portions of lines of credit and commitments to extend various types of credit. 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 the 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 is secured by real estate located in New Jersey. Accordingly, the collectability of a substantial portion of the loan portfolio of the Bank is susceptible to changes in the real estate market.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Commitments, Contingencies and Concentrations of Credit Risk – (continued)
The following table provides a summary of financial instruments with off-balance sheet risk at December 31, 2009 and 2008:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Commitments under commercial loans and lines of credit | $ | 70,076 | $ | 71,271 | ||||
| Home equity and other revolving lines of credit | 54,572 | 61,886 | ||||||
| Outstanding commercial mortgage loan commitments | 33,659 | 31,831 | ||||||
| Standby letters of credit | 1,676 | 2,357 | ||||||
| Performance letters of credit | 11,466 | 13,745 | ||||||
| Outstanding residential mortgage loan commitments | 4,153 | 1,588 | ||||||
| Overdraft protection lines | 5,058 | 4,480 | ||||||
| Other consumer | 11 | 36 | ||||||
| Total | $ | 180,671 | $ | 187,194 | ||||
Other expenses include rentals for premises and equipment of $704,000 in 2009, $1,092,000 in 2008 and $1,004,000 in 2007. At December 31, 2006, the Corporation was 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 2010 through 2014 are $592,000, $607,000, $625,000, $500,000 and $533,000, respectively. Minimum rentals due 2015 and after are $4,857,000.
The Corporation is subject to claims and lawsuits that arise in the ordinary course of business. Based upon the information currently available 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, results of operations, or liquidity of the Corporation.
Note 13 — Stockholders’ Equity, Regulatory Requirements and Subsequent Event
On January 12, 2009, the Corporation issued $10 million in nonvoting senior preferred stock to the U.S. Department of Treasury under the Capital Purchase Program. As part of the transaction, the Corporation also issued warrants to the U.S. Treasury to purchase 173,410 shares of common stock of the Corporation at an exercise price of $8.65 per share. As previously announced, the Corporation’s voluntary participation in the Capital Purchase Program amounted to approximately 50 percent of what the Corporation had qualified for under the U.S. Treasury program. The Corporation believes that its participation in this program will strengthen its current well-capitalized position. The funding will be used to support future loan growth. As a result of the successful completion of the rights offering in October 2009, the number of shares underlying the warrants held by the U.S. Treasury was reduced to 86,705 shares, or 50 percent of the original 173,410 shares as outlined by the provisions of the Capital Purchase Program.
Federal Deposit Insurance Corporation (“FDIC”) and the Board of Governors of the Federal Reserve System (“FRB”) regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2009, the Bank was required to maintain (i) a minimum leverage ratio of Tier I capital to total adjusted assets of 4.00 percent, and (ii) minimum ratios of Tier I and total capital to risk-weighted assets of 4.00 percent and 8.00 percent, respectively.
Under its prompt corrective action regulations, the regulators are required to take certain supervisory actions with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements. The regulations establish a framework for the classification of financial
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Stockholders’ Equity, Regulatory Requirements and Subsequent Event – (continued)
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 I) capital ratio of at least 5.00 percent; a Tier I risk-based capital ratio of at least 6.00 percent; and a total risk-based capital ratio of at least 10.00 percent.
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 regulators about capital components, risk weightings and other factors. The Comptroller of the Currency (“OCC”) has established higher minimum capital ratios for the Bank effective as of December 31, 2009: Tier 1 Risk-Based Capital of 10.0 percent, Total Risk-Based Capital of 12.0 percent and Tier 1 Leverage Capital of 8.0 percent. Similar categories apply to bank holding companies. At December 31, 2009, the Bank’s capital ratios were all above the minimum levels required, other than the Tier 1 Leverage Capital ratio, which was slightly below the 8.0 percent established by the OCC for the Bank.
At December 31, 2009, management believes that the Bank and the Parent Corporation met all capital adequacy requirements to which they are subject, other than the Tier 1 Leverage Capital ratio, which was slightly below the 8.0 percent established by the OCC for the Bank.
The following is a summary of the Bank’s and the Parent Corporation’s actual capital amounts and ratios as of December 31, 2009 and 2008, compared to the FRB and FDIC minimum capital adequacy requirements and the FRB and FDIC requirements for classification as a well-capitalized institution.
| | | | | | | ||||||||||||||||||
| Union Center National Bank Actual | Minimum Capital Adequacy | For Classification Under Corrective Action Plan as Well Capitalized | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| December 31, 2009 Leverage (Tier 1) capital | $ | 97,116 | 7.62 | % | $ | 52,131 | 4.00 | % | $ | 64,313 | 5.00 | % | ||||||||||||
| Risk-Based Capital: | ||||||||||||||||||||||||
| Tier 1 | $ | 97,116 | 11.25 | % | $ | 34,521 | 4.00 | % | $ | 51,781 | 6.00 | % | ||||||||||||
| Total | 105,402 | 12.21 | % | 69,042 | 8.00 | % | 86,302 | 10.00 | % | |||||||||||||||
| December 31, 2008 Leverage (Tier 1) capital | 76,598 | 7.54 | % | 41,655 | 4.00 | % | 51,214 | 5.00 | % | |||||||||||||||
| Risk-Based Capital: | ||||||||||||||||||||||||
| Tier 1 | $ | 76,598 | 9.99 | % | $ | 30,672 | 4.00 | % | $ | 46,008 | 6.00 | % | ||||||||||||
| Total | 82,852 | 10.80 | % | 61,344 | 8.00 | % | 76,680 | 10.00 | % | |||||||||||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Stockholders’ Equity, Regulatory Requirements and Subsequent Event – (continued)
| | | | | | | ||||||||||||||||||
| Parent Corporation Actual | Minimum Capital Adequacy | For Classification as Well Capitalized | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| December 31, 2009 Leverage (Tier 1) capital | $ | 99,338 | 7.80 | % | $ | 52,141 | 4.00 | % | $ | 64,325 | 5.00 | % | ||||||||||||
| Risk-Based Capital: | ||||||||||||||||||||||||
| Tier 1 | $ | 99,338 | 11.51 | % | $ | 34,534 | 4.00 | % | $ | 51,801 | 6.00 | % | ||||||||||||
| Total | 107,613 | 12.46 | % | 69,067 | 8.00 | % | N/A | N/A | ||||||||||||||||
| December 31, 2008 Leverage (Tier 1) capital | 78,237 | 7.71 | % | 41,619 | 4.00 | % | 51,618 | 5.00 | % | |||||||||||||||
| Risk-Based Capital: | ||||||||||||||||||||||||
| Tier 1 | $ | 78,237 | 10.20 | % | $ | 30,675 | 4.00 | % | $ | 46,013 | 6.00 | % | ||||||||||||
| Total | 84,491 | 11.02 | % | 61,350 | 8.00 | % | N/A | N/A | ||||||||||||||||
The Corporation issued $5.2 million of subordinated debentures in 2003. These securities are included as a component of Tier 1 Capital for regulatory purposes.
On March 1, 2005, the Federal Reserve adopted a final rule that allows the continued inclusion of outstanding and prospective issuances of trust preferred securities in the Tier I Capital of bank holding companies, subject to stricter quantitative limits and qualitative standards. The new quantitative limits became effective after a five-year transition period ending March 31, 2009. Under the final rules, trust preferred securities and other restricted core capital elements are limited to 25% of all core capital elements. Amounts of restricted core capital elements in excess of these limits may be included in Tier II Capital. Based on a review of the final rule, the Corporation believes that its trust preferred issues qualify as Tier I Capital. However, in the event that the trust preferred issues do not qualify as Tier I Capital, the Corporation would remain well-capitalized.
Note 14 — Comprehensive Income
Total comprehensive income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Corporation’s other comprehensive income (loss) is comprised of unrealized holding gains and losses on securities available-for-sale, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Corporation’s defined benefit pension plan, net of taxes.
Disclosure of comprehensive income for the years ended December 31, 2009, 2008 and 2007 is presented in the Consolidated Statements of Changes in Stockholders’ Equity. The table below provides a reconciliation of the components of other comprehensive income to the disclosure provided in the statement of changes in stockholders’ equity.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Comprehensive Income – (continued)
The components of other comprehensive income (loss), net of taxes, were as follows for the following fiscal years ended December 31:
| | | | |||||||||
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Unrealized losses on debt securities for which a portion of the impairment has been recognized in income | $ | (1,830 | ) | $ | — | $ | — | |||||
| Reclassification adjustments of OTTI losses included in income | (4,238 | ) | — | — | ||||||||
| Unrealized losses on other available for sale securities | (1,979 | ) | (3,328 | ) | (4,079 | ) | ||||||
| Reclassification adjustment for net gain/(loss) arising during this period | 4,729 | 655 | 312 | |||||||||
| Net unrealized losses | (3,318 | ) | (2,673 | ) | (3,767 | ) | ||||||
| Tax effect | 1,354 | 1,584 | 1,163 | |||||||||
| Net of tax amount | (1,964 | ) | (1,089 | ) | (2,604 | ) | ||||||
| Change in minimum pension liability | 25 | — | — | |||||||||
| Tax effect | (10 | ) | — | — | ||||||||
| Net of tax amount | 15 | — | — | |||||||||
| Net actuarial gains (losses) | 142 | (3,332 | ) | (583 | ) | |||||||
| Tax effect | (57 | ) | 1,333 | 233 | ||||||||
| Net of tax amount | 85 | (1,999 | ) | (350 | ) | |||||||
| Change in pension plan – curtailment | — | — | 1,353 | |||||||||
| Tax effect | — | — | (541 | ) | ||||||||
| Net of tax amount | — | — | 812 | |||||||||
| Market value adjustment on securities transferred from held-to-maturity to available-for-sale | — | — | (459 | ) | ||||||||
| Tax effect | — | — | 187 | |||||||||
| Net of tax amount | — | — | (272 | ) | ||||||||
| Other comprehensive loss, net of tax | $ | (1,864 | ) | $ | (3,088 | ) | $ | (2,414 | ) | |||
Accumulated other comprehensive loss at December 31, 2009 and 2008 consisted of the following:
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Investment securities available for sale, net of tax | $ | (8,428 | ) | $ | (6,464 | ) | ||
| Defined benefit pension and post-retirement plans, net of tax | (2,348 | ) | (2,448 | ) | ||||
| Total | $ | (10,776 | ) | $ | (8,912 | ) | ||
Note 15 — Pension and Other Benefits
Defined Benefit Plans
The Corporation maintained a non-contributory pension plan for substantially all of its employees until September 30, 2007, at which time the Corporation froze its defined benefit pension plan. The benefits are based on years of service and the employee’s compensation over the prior five-year period. The plan’s benefits are payable in form of a ten year certain and life annuity. The plan is intended to be a tax-qualified defined benefit plan under Section 401(a) of the Internal Revenue Code. The Pension Plan, which has been in effect since March 15, 1950, generally covers employees of Union Center National Bank and the Parent Corporation
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Pension and Other Benefits – (continued)
who have attained age 21 and completed one year of service. Payments may be made under the Pension Plan once attaining the normal retirement age of 65 and is generally equal to 44 percent of a participant’s highest average compensation over a 5-year period.
In addition, the Corporation has a non-qualified retirement plan that is designed to supplement the pension plan for key employees. The plan is known as the Union Center National Bank Benefit Equalization Plan, or “BEP”. The BEP is a nonqualified, unfunded supplemental retirement plan, which is designed to replace the benefits that cannot be provided under the terms of the Pension Plan solely due to certain compensation and benefit limits placed on tax-qualified pension plans under the Internal Revenue Code. Benefits under the BEP Plan were paid out in 2009.
On August 9, 2007, the Corporation froze its defined benefit pension plan and redesigned its 401(k) savings plan, effective September 30, 2007. The changes are consistent with ongoing cost reduction strategies and shift the focus of future savings of retirement benefits toward the more predictable cost structure of a 401(k) plan and away from the legacy costs of a defined benefit pension plan. The changes included a discontinuation of the accrual of future benefits in the Corporation’s defined benefit pension plan and fully preserving all retirement benefits that employees will have earned as of September 30, 2007, and the redesigning of the Corporation’s 401(k) plan to provide a dollar-for-dollar matching contribution up to six percent of salary deferrals. The Corporation also froze all other defined benefit plans. As a result, the Corporation recorded a one-time pre-tax benefit related to these pension plan changes of approximately $1.2 million in 2007 as a result of the curtailment of the defined benefit plan.
In 1999, the Corporation adopted a Director’s Retirement Plan, which is designed to provide retirement benefits for members of the Board of Directors. There was no recorded expense associated with the plan in 2009, 2008 and 2007. During the third quarter of 2008, the Corporation recognized a $272,000 benefit relating to a lump-sum payment and termination of the Directors Retirement Plan. This benefit represented the difference between the actuarial present value of the lump-sum payments and the accrued liability previously recorded on the Corporation’s balance sheet.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Pension and Other Benefits – (continued)
The following table sets forth changes in projected benefit obligation, changes 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, 2009 and 2008.
| | | ||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| Change in Benefit Obligation: | ||||||||
| Projected benefit obligation at beginning of year | $ | 9,923 | $ | 11,497 | ||||
| Service cost | — | — | ||||||
| Interest cost | 606 | 676 | ||||||
| Actuarial loss | 617 | 107 | ||||||
| Benefits paid | (486 | ) | (663 | ) | ||||
| Curtailments | — | (719 | ) | |||||
| Settlement | — | (975 | ) | |||||
| Projected benefit obligation at end of year | $ | 10,660 | $ | 9,923 | ||||
| Change in Plan Assets: | ||||||||
| Fair value of plan assets at beginning year | $ | 5,734 | $ | 9,008 | ||||
| Actual return on plan assets | 930 | (2,728 | ) | |||||
| Employer contributions | 474 | 1,092 | ||||||
| Benefits paid | (486 | ) | (663 | ) | ||||
| Settlement | — | (975 | ) | |||||
| Fair value of plan assets at end of year | $ | 6,652 | $ | 5,734 | ||||
| Funded status | $ | (4,008 | ) | $ | (4,189 | ) | ||
Amounts related to unrecognized actuarial losses for the plan, on a pre-tax basis, that have been recognized in accumulated other comprehensive loss at December 31, 2009 and 2008 amounted to $3,914,000 and $4,082,000, respectively.
The net periodic pension cost for 2009, 2008 and 2007 includes the following components:
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Service cost | $ | — | $ | — | $ | 627 | ||||||
| Interest cost | 606 | 701 | 707 | |||||||||
| Expected return on plan assets | (288 | ) | (658 | ) | (674 | ) | ||||||
| Net amortization and deferral | — | — | 13 | |||||||||
| Recognized curtailment gain | — | — | (1,155 | ) | ||||||||
| Net periodic pension expense (benefit) | $ | 318 | $ | 43 | $ | (482 | ) | |||||
The following table presents the assumptions used to calculate the projected benefit obligation in each of the last three years.
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Discount rate | 5.75 | % | 6.25 | % | 5.75 | % | ||||||
| Rate of compensation increase | N/A | N/A | 4.25 | % | ||||||||
| Expected long-term rate of return on plan assets | 5.00 | % | 7.50 | % | 7.50 | % | ||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Pension and Other Benefits – (continued)
The following information is provided at December 31:
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Information for Plans With a Benefit Obligation in Excess of Plan Assets | ||||||||||||
| Projected benefit obligation | $ | 10,660 | $ | 9,923 | $ | 11,497 | ||||||
| Accumulated benefit obligation | 10,660 | 9,923 | 11,497 | |||||||||
| Fair value of plan assets | 6,652 | 5,734 | 9,008 | |||||||||
| Assumptions | ||||||||||||
| Weighted average assumptions used to determine benefit obligation at December 31 | ||||||||||||
| Discount rate | 6.25 | % | 6.25 | % | 6.25 | % | ||||||
| Rate of compensation increase | N/A | N/A | N/A | |||||||||
| Weighted average assumptions used to determine net periodic benefit cost for years ended December 31 | ||||||||||||
| Discount rate | 6.25 | % | 6.25 | % | 5.75 | % | ||||||
| Expected long-term return on plan assets | 5.00 | % | 7.50 | % | 7.50 | % | ||||||
| Rate of compensation increase | N/A | N/A | 4.25 | % | ||||||||
The process of determining the overall expected long-term rate of return on plan assets begins with a review of appropriate investment data, including current yields on fixed income securities, historical investment data, historical plan performance and forecasts of inflation and future total returns for the various asset classes. This data forms the basis for the construction of a best-estimate range of real investment return for each asset class. An average, weighted real-return range is computed reflecting the Plan’s expected asset mix, and that range, when combined with an expected inflation range, produces an overall best-estimate expected return range. Specific factors such as the Plan’s investment policy, reinvestment risk and investment volatility are taken into consideration during the construction of the best estimate real return range, as well as in the selection of the final return assumption from within the range.
Plan Assets
The Union Center National Bank Pension Trust’s weighted-average asset allocation at December 31, 2009, 2008 and 2007, by asset category, is as follows:
| | | | |||||||||
| Asset Category | 2009 | 2008 | 2007 | |||||||||
| Equity securities | 44 | % | 48 | % | 80 | % | ||||||
| Debt and/or fixed income securities | 46 | % | 34 | % | 20 | % | ||||||
| Alternative investments, including commodities, foreign currency and real estate | 5 | % | 9 | % | — | |||||||
| Cash and other alternative investments, including hedge funds, equity structured notes | 5 | % | 9 | % | — | |||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Pension and Other Benefits – (continued)
The general investment policy of the Pension Trust is for the fund to experience growth in assets that will allow the market value to exceed the value of benefit obligations over time. Appropriate diversification on a total fund basis is achieved by following an allowable range of commitment within asset category, as follows:
| | | ||||||
| Range | Target | |||||||
| Equity securities | 36 – 52 | % | 44 | % | ||||
| Debt and/or fixed income securities | 38 – 54 | % | 46 | % | ||||
| International equity | N/A | N/A | ||||||
| Short term | N/A | N/A | ||||||
| Other | 7 – 14 | % | 10 | % | ||||
The fair value of the Corporation’s pension plan assets at December 31, 2009, by asset category, are as follows:
| | | | | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Cash | $ | 1,020 | $ | 1,020 | $ | — | $ | — | ||||||||
| Equity Securities: | ||||||||||||||||
| U.S. companies | 1,327 | 1,327 | — | — | ||||||||||||
| International companies | 1,163 | 1,163 | — | — | ||||||||||||
| U.S. Treasury securities | 2,301 | 2,301 | — | — | ||||||||||||
| Corporate bonds | 340 | 340 | — | — | ||||||||||||
| Commodities | 170 | 170 | — | — | ||||||||||||
| Hedge funds | 331 | — | — | 331 | ||||||||||||
| Total | $ | 6,652 | $ | 6,321 | $ | — | $ | 331 | ||||||||
The following table presents the changes in pension plan asset with significant unobservable inputs (Level 3) for the year ended December 31:
| | |||
| 2009 | ||||
| (Dollars in Thousands) | ||||
| Beginning balance, January 1, | $ | 663 | ||
| Actual return on plan assets: | ||||
| Relating to assets still held at the reporting date | 88 | |||
| Relating to assets sold during the period | — | |||
| Purchases, sales and settlements | — | |||
| Transfers out of Level 3 | (420 | ) | ||
| Ending balance, December 31, | $ | 331 | ||
The investment manager is not authorized to purchase, acquire or otherwise hold certain types of market securities (subordinated bonds, commodities, real estate investment trusts, limited partnerships, naked puts, naked calls, stock index futures, oil, gas or mineral exploration ventures or unregistered securities) or to employ certain types of market techniques (margin purchases or short sales) or to mortgage, pledge, hypothecate, or in any manner transfer as security for indebtedness, any security owned or held by the Plan.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Pension and Other Benefits – (continued)
Cash Flows
Contributions
The Bank expects to contribute $646,000 to its Pension Trust in 2010.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in each year 2010, 2011, 2012, 2013, 2014 and years 2015-2019, respectively: $641,464, $655,491, $740,493, $768,895, $803,473 and $4,124,112.
401(k) Benefit Plan
The Corporation maintains a 401(k) employee savings plan to provide for defined contributions which covers substantially all employees of the Corporation. Prior to October 1, 2007, the Corporation’s contributions to the plan were limited to fifty percent of a matching percentage of each employee’s contribution up to six percent of the employee’s salary. Effective October 1, 2007, the Corporation redesigned its 401(k) plan to provide a dollar-for-dollar matching contribution up to six percent of salary deferrals. For 2009, 2008 and 2007, employer contributions amounted to $266,000, $281,000 and $193,000, respectively.
Note 16 — Stock Based Compensation
Stock Option Plans
At December 31, 2009, the Corporation maintained two stock-based compensation plans from which new grants could be issued. The 2009 Equity Incentive Plan permits the grant of “incentive stock options” as defined under the Internal Revenue Code, non-qualified stock options, restricted stock awards and restricted stock unit awards to employees, including officers, and consultants of the Corporation and its subsidiaries. The 2003 Non-Employee Director Stock Option Plan permits the grant of non-qualified stock options to the Corporation’s non-employee directors. An aggregate of 400,000 shares remain available for grant under the 2009 Equity Incentive Plan and an aggregate of 452,874 shares remain available for grant under the 2003 Non-Employee Director Stock Option Plan. Such shares may be treasury shares, newly issued shares or a combination thereof.
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 over a three year vesting period starting one year after the date of grant and generally expire ten years from the date of grant.
The total compensation expense related to these plans was $77,000, $128,000 and $151,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
For the year ended December 31, 2009, the Corporation’s income before income taxes and net income was reduced by $77,000 and $51,000, respectively, as a result of the compensation expense related to stock options. For the year ended December 31, 2008, the Corporation’s income before income taxes and net income was reduced by $128,000 and $84,000, respectively. For the year ended December 31, 2007, the Corporation’s income before income taxes and net income was reduced by $151,000 and $100,000, respectively.
Under the principal option plans, the Corporation may grant restricted stock awards to certain employees. Restricted stock awards are non-vested stock awards. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. Such awards generally vest during a period specified at the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The Corporation expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant,
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Stock Based Compensation – (continued)
ratably over the period during which the restrictions lapse. During 2009, no shares were awarded while in 2008, there were 3,028 shares awarded. During 2007, no shares were awarded. All shares were issued from Treasury shares. In 2009, there were no compensation costs related to restricted stock awards included in salary expense. The amount of compensation cost related to restricted stock awards included in salary expense was approximately $25,000 in 2008 and none in 2007. As of December 31, 2009, all shares of restricted stock awards were vested. Thus, there were no restricted stock awards outstanding at December 31, 2009 and 2008.
Options covering 38,203, 38,203 and 38,203 shares were granted on March 1, 2009, March 1, 2008 and June 1, 2007, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values:
| | | | |||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Weighted average fair value of grants | $ | 1.48 | $ | 3.10 | $ | 6.48 | ||||||
| Risk-free interest rate | 1.90 | % | 3.03 | % | 4.92 | % | ||||||
| Dividend yield | 4.69 | % | 2.43 | % | 2.51 | % | ||||||
| Expected volatility | 33.0 | % | 30.2 | % | 47.4 | % | ||||||
| Expected life in months | 69 | 88 | 72 | |||||||||
Option activity under the principal option plans as of December 31, 2009 and changes during the twelve months ended December 31, 2009 were as follows:
| | | | | ||||||||||||
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2008 | 185,164 | $ | 10.45 | |||||||||||||
| Granted | 38,203 | 7.67 | ||||||||||||||
| Exercised | (9,289 | ) | 6.07 | |||||||||||||
| Forfeited/cancelled/expired | (22,076 | ) | 11.04 | |||||||||||||
| Outstanding at December 31, 2009 | 192,002 | $ | 10.04 | 5.82 | $ | 91,679 | ||||||||||
| Exercisable at December 31, 2009 | 124,271 | $ | 10.05 | 4.36 | $ | 48,267 | ||||||||||
The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the twelve-months of fiscal 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. This amount changes based on the fair market value of the Parent Corporation’s stock.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 — Stock Based Compensation – (continued)
As of December 31, 2009, $143,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.1 years. Changes in options outstanding during the past three years were as follows:
| | | ||||||
| Stock Option Plan | Shares | Exercise Price Range per Share | ||||||
| Outstanding, December 31, 2006 (262,527 shares exercisable) | 340,850 | $ | 6.07 to $15.12 | |||||
| Granted during 2007 | 38,203 | $ | 15.73 | |||||
| Exercised during 2007 | (95,861 | ) | $ | 6.07 to $10.66 | ||||
| Expired or canceled during 2007 | (18,937 | ) | $ | 10.50 to $15.73 | ||||
| Outstanding, December 31, 2007 (188,273 shares exercisable) | 264,255 | $ | 6.07 to $15.73 | |||||
| Granted during 2008 | 38,203 | $ | 11.15 | |||||
| Exercised during 2008 | (25,583 | ) | $ | 6.07 to $10.66 | ||||
| Expired or canceled during 2008 | (91,711 | ) | $ | 6.07 to $15.73 | ||||
| Outstanding, December 31, 2008 (125,468 shares exercisable) | 185,164 | $ | 6.07 to $15.73 | |||||
| Granted during 2009 | 38,203 | $ | 7.67 | |||||
| Exercised during 2009 | (9,289 | ) | $ | 6.07 | ||||
| Expired or canceled during 2009 | (22,076 | ) | $ | 6.07 to $15.73 | ||||
| Outstanding, December 31, 2009 (124,271 shares exercisable) | 192,002 | $ | 7.67 to $15.73 | |||||
Under the Director Stock Option Plan, there were stock options granted with a weighted average fair value of 38,203 and $1.48, 38,203 and $3.10 and 38,203 and $6.48 during the years ended December 31, 2009, 2008 and 2007, respectively. There were no stock options granted under the Employee Stock Incentive Plan during the years ended December 31, 2009, 2008 and 2007.
Note 17 — Dividends and Other Restrictions
Certain restrictions, including capital requirements, exist on the availability of undistributed net profits of the Bank for the future payment of dividends to the Parent Corporation. A dividend may not be paid if it would impair the capital of the Bank. 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 the retained profits for the two preceding years. Pursuant to a Memorandum of Understanding (“MOU”) between the Bank and the Office of the Comptroller of the Currency (“OCC”), the Bank may not declare dividends without prior approval of the OCC. At December 31, 2009, approximately $5.2 million was available for payment of dividends based on the preceding guidelines.
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Corporation’s financial and non-financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial and non-financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial and non-financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
In September 2006, the FASB issued FASB ASC 820-10-05 (previously SFAS No. 157, “Fair Value Measurements”). FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
In December 2007, the FASB issued FASB ASC 820-10-15 (previously FASB Statement Position 157-2, “Effective Date of FASB Statement No. 157”). FASB ASC 820-10-15 delays the effective date of FASB ASC 820-10-05 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. As such, the Corporation adopted the provisions of FASB ASC 820-10-05 relating to non-financial assets and liabilities in 2009. In October 2008, the FASB issued FASB ASC 820-10-35 (previously FASB Staff Position 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active”), to clarify the application of the provisions of FASB ASC 820-10-05 in an inactive market and how an entity would determine fair value in an inactive market. FASB ASC 820-10-35 was applied to the Corporation’s December 31, 2008 consolidated financial statements.
FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly. This ASC is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FASB ASC 820-10-65 was applied to the Corporation’s consolidated financial statements, effective June 30, 2009.
FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The Hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows:
| • | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| • | Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| • | Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity). |
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a recurring basis at December 31, 2009 and December 31, 2008:
Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate those assets’ fair value.
Securities Available-for-Sale
Where quoted prices are available in an active market, securities are classified with Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy, include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value and are classified as Level 3. Due to the inactive condition of the markets amidst the financial crisis, the Corporation treated certain securities as Level 3 securities in order to provide more appropriate valuations. For assets in an inactive market, the infrequent trades that do occur are not a true indication of fair value. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Corporation’s evaluations are based on market data and the Corporation employs combinations of these approaches for its valuation methods depending on the asset class.
At December 31, 2009, the Corporation’s two pooled trust preferred securities and one private issue single name trust preferred security were classified as Level 3. During 2009, there was a marked improvement in the pricing of financial institutions debt securities. As a result, all private label collateralized mortgage obligations (“CMOs”), and all but one of the single issuer trust preferred securities, were transferred back to Level 2 pricing. Market pricing for these Level 3 securities varied widely from one pricing service to another based on the lack of trading. As such, these securities were considered to no longer have readily observable market data that was accurate to support a fair value as prescribed by FASB ASC 820-10-05. The fair value measurement objective remained the same in that the price received by the Corporation would result from an orderly transaction (an exit price notion) and that the observable transactions considered in fair value were not forced liquidations or distressed sales at the measurement date.
In regards to the pooled trust preferred securities (“pooled TRUPS”) and the private issue single name trust preferred security (“single name TRUP”), or collectively (“TRUPS”), the Corporation was able to determine fair value of the TRUPS using a market approach validation technique based on Level 2 inputs that did not require significant adjustments. The Level 2 inputs included:
| (a) | Quoted prices in active markets for similar TRUPS with insignificant adjustments for differences between the TRUPS that the Corporation holds and similar TRUPS. |
| (b) | Quoted prices in markets that are not active that represent current transactions for the same or similar TRUPS that do not require significant adjustment based on unobservable inputs. |
Since June 30, 2008, the market for these TRUPS has become increasingly inactive. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these TRUPS trade and then by a significant decrease in the volume of trades relative to historical levels as well as other relevant factors. At December 31, 2009, the Corporation determined that the market for similar TRUPS had stabilized. That determination was made considering that there are more observable transactions for similar TRUPS, the prices for those transactions that have occurred are current and or represent fair value, and the observable prices for those transactions have stabilized over time, thus increasing the potential relevance of those observations. However, the Corporation’s three TRUPS at December 31, 2009 have been classified within Level 3 because the Corporation determined that significant adjustments using unobservable inputs are required to determine a true fair value at the measurement date.
The Corporation determined that an income approach valuation technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at the prior measurement dates. As a result, the Corporation used the discount rate adjustment technique to determine fair value.
The fair value as of December 31, 2009 was determined by discounting the expected cash flows over the life of the security. The discount rate was determined by deriving a discount rate when the markets were considered more active for this type of security. To this estimated discount rate, additions were made for more liquid markets and increased credit risk as well as assessing the risks in the security, such as default risk and
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
severity risk. With the exception of the two pooled trust preferred securities, for which $3.4 million of impairment charges were taken to earnings during 2009, the securities continue to make scheduled cash flows and no material cash flow payment defaults have occurred to date.
Loans Held for Sale
Loans held for sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.
Loans Receivable
The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate inherent in the loan. The estimate of maturity is based on the historical experience of the Bank 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.
Restricted Stocks
The carrying amount of restricted investment in bank stocks, which includes stock of the Federal Home Loan Bank of New York, Federal Reserve Bank of New York and Atlantic Central Bankers Bank, approximates fair value, and considers the limited marketability of such securities.
Accrued Interest Receivable and Payable
The carrying value of accrued interest receivable and accrued interest payable approximates its fair value.
Deposits
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, 2009 and 2008. 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.
Short-Term Borrowings
Short-term borrowings that mature within six months and securities sold under agreements to repurchase have fair values which approximate carrying value.
Long-Term Borrowings
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
Subordinated Debt
The fair value of subordinated debentures is estimated by discounting the estimated future cash flows, using market discount rates of financial instruments with similar characteristics, terms and remaining maturity.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credits is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
current levels of interest rate and the committed rates. The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2009 and December 31, 2008 are as follows:
| | | | | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Financial Instruments Measured at Fair Value on a Recurring Basis: | ||||||||||||||||
| U.S. Treasury & Agency Securities | $ | 2,089 | $ | 2,089 | $ | — | $ | — | ||||||||
| Federal Agency Obligations | 214,585 | 55,470 | 159,115 | — | ||||||||||||
| Obligations of U.S. States and Political Subdivision | 19,281 | — | 19,281 | — | ||||||||||||
| Trust preferred securities | 26,715 | — | 24,366 | 2,349 | ||||||||||||
| Other debt securities | 29,921 | 7,248 | 22,673 | — | ||||||||||||
| Equity securities | 5,533 | 5,533 | — | — | ||||||||||||
| Securities available-for-sale | $ | 298,124 | $ | 70,340 | $ | 225,435 | $ | 2,349 | ||||||||
| | | | | ||||||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
| December 31, 2008 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Financial Instruments Measured at Fair Value on a Recurring Basis: | ||||||||||||||||||||
| U.S. Treasury & Agency Securities | $ | 100 | $ | 100 | $ | — | $ | — | ||||||||||||
| Federal Agency Obligations | 82,797 | — | 82,797 | — | ||||||||||||||||
| Obligations of U.S. States and Political Subdivision | 52,094 | 2,190 | 49,904 | — | ||||||||||||||||
| Trust preferred securities | 31,771 | — | 14,713 | 17,058 | ||||||||||||||||
| Other debt securities | 59,362 | 3,816 | 49,050 | 6,496 | ||||||||||||||||
| Equity securities | 16,590 | 16,590 | — | — | ||||||||||||||||
| Securities available-for-sale | $ | 242,714 | $ | 22,696 | $ | 196,464 | $ | 23,554 | ||||||||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
The following table presents the changes in securities available-for-sale with significant unobservable inputs (Level 3) for the year ended December 31, 2009 and December 31, 2008:
| | |||
| 2009 | ||||
| (Dollars in Thousands) | ||||
| Beginning balance, January 1, | $ | 23,554 | ||
| Transfers out of Level 3 | (19,855 | ) | ||
| Principal interest deferrals | 139 | |||
| Total net losses included in net income | (4,403 | ) | ||
| Total net unrealized gains | 2,914 | |||
| Ending balance, December 31, | $ | 2,349 | ||
| | |||
| 2008 | ||||
| (Dollars in Thousands) | ||||
| Beginning balance, January 1, | $ | — | ||
| Transfers in (out) of Level 3 | 27,629 | |||
| Principal paydowns | (309 | ) | ||
| Total net unrealized losses | (3,766 | ) | ||
| Ending balance, December 31, | $ | 23,554 | ||
Assets Measured at Fair Value on a Non-Recurring Basis
For assets measured at fair value on a non-recurring basis, the fair value measurements at December 31, 2009 are as follows:
| | | | | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| December 31, 2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Assets Measured at Fair Value on a Non-Recurring Basis: | ||||||||||||||||
| Impaired loans | $ | 8,058 | $ | — | $ | — | $ | 8,058 | ||||||||
At December 31, 2009 and 2008, impaired loans totaled $8,058,000 and $634,000, respectively. The amount of related valuation allowances was $662,000 at December 31, 2009 and none at December 31, 2008.
The following methods and assumptions were used to estimate the fair values of the Corporation’s assets measured at fair value on a non-recurring basis at December 31, 2009 and 2008:
Impaired Loans
The value of an impaired loan is measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio. The Corporation’s impaired loans are primarily collateral dependent. Impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows.
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
Other Real Estate Owned
Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. The Corporation believes that the fair value component in its valuation follows the provisions of FASB ASC 820-10-05. Fair value of OREO is determined by sales agreements or appraisals by qualified licensed appraisers approved and hired by the Corporation. Costs to sell associated with OREO is based on estimation per the terms and conditions of the sales agreements or appraisal. At December 31, 2009, the Corporation held no OREO as the residential real estate condominium project was sold during the third quarter of 2009.
FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Corporation’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities except for loans held-for-sale and available-for-sale securities. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Corporation for the purposes of this disclosure.
Estimated fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and the recorded book balances at December 31, 2009 and 2008, were as follows:
| | | | | ||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| FINANCIAL ASSETS: | ||||||||||||||||
| Cash and cash equivalents | $ | 89,168 | $ | 89,168 | $ | 15,031 | $ | 15,031 | ||||||||
| Investment securities available-for-sale | 298,124 | 298,124 | 242,714 | 242,714 | ||||||||||||
| Net loans | 707,178 | 713,474 | 669,949 | 673,976 | ||||||||||||
| Restricted investment in bank stocks | 10,672 | 10,672 | 10,230 | 10,230 | ||||||||||||
| Accrued interest receivable | 4,033 | 4,033 | 4,154 | 4,154 | ||||||||||||
| FINANCIAL LIABILITIES: | ||||||||||||||||
| Non-interest-bearing deposits | 130,518 | 130,518 | 113,319 | 113,319 | ||||||||||||
| Interest-bearing deposits | 683,187 | 683,974 | 546,218 | 548,747 | ||||||||||||
| Federal funds purchased, securities sold under agreement to repurchase and FHLB advances | 269,253 | 279,219 | 268,440 | 296,144 | ||||||||||||
| Subordinated debentures | 5,155 | 5,155 | 5,155 | 4,875 | ||||||||||||
| Accrued interest payable | 1,825 | 1,825 | 2,201 | 2,201 | ||||||||||||
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.
The Corporation’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Corporation’s core deposit base is required by FASB ASC 825-10.
Fair value estimates are based on existing 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. For example, there are certain significant assets and liabilities that are not considered
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Fair Value Measurements and Fair Value of Financial Instruments – (continued)
financial assets or liabilities, such as the brokerage network, deferred taxes, premises and equipment, and goodwill. 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 in the estimates.
Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
Note 19 — Parent Corporation Only Financial Statements
The Parent Corporation 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 subsidiaries and dividends paid reduce the investment in the subsidiaries. The ability of the Parent 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 17 of the Notes to Consolidated Financial Statements).
Condensed financial statements of the Parent Corporation only are as follows:
Condensed Statements of Condition
| | | ||||||
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands) | ||||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 2,683 | $ | 922 | ||||
| Investment in subsidiaries | 104,946 | 85,229 | ||||||
| Securities available for sale | 501 | 1,255 | ||||||
| Other assets | 248 | 1,306 | ||||||
| Total assets | $ | 108,378 | $ | 88,712 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Other liabilities | $ | 280 | $ | 1,041 | ||||
| Securities sold under repurchase agreement | 392 | 803 | ||||||
| Subordinated debentures | 5,155 | 5,155 | ||||||
| Stockholders’ equity | 102,551 | 81,713 | ||||||
| Total liabilities and stockholders’ equity | $ | 108,378 | $ | 88,712 | ||||
Condensed Statements of Income
| | | | |||||||||
| For Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Income: | ||||||||||||
| Dividend income from subsidiaries | $ | 2,474 | $ | 4,675 | $ | 7,074 | ||||||
| Other income | 3 | 37 | 58 | |||||||||
| Net securities gains (losses) | (325 | ) | (413 | ) | 95 | |||||||
| Management fees | 298 | 275 | 221 | |||||||||
| Total Income | 2,450 | 4,574 | 7,448 | |||||||||
| Expenses | (604 | ) | (623 | ) | (1,718 | ) | ||||||
| Income before equity in undistributed earnings (loss) of subsidiaries | 1,846 | 3,951 | 5,730 | |||||||||
| Equity in undistributed earnings (loss) of subsidiaries | 2,727 | 1,891 | (1,874 | ) | ||||||||
| Net Income | $ | 4,573 | $ | 5,842 | $ | 3,856 | ||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 — Parent Corporation Only Financial Statements – (continued)
Condensed Statements of Cash Flows
| | | | |||||||||
| For Years Ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 4,573 | $ | 5,842 | $ | 3,856 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Net securities losses (gains) | 325 | 413 | (95 | ) | ||||||||
| Equity in undistributed loss (earnings) of subsidiary | (2,727 | ) | (1,891 | ) | 1,874 | |||||||
| Change in deferred tax asset | (111 | ) | (1,542 | ) | — | |||||||
| Decrease (increase) in other assets | 1,838 | 41 | 1,516 | |||||||||
| Increase (decrease) in other liabilities | (844 | ) | 1,610 | (1,114 | ) | |||||||
| Stock based compensation | 77 | 128 | 151 | |||||||||
| Net cash provided by operating activities | 3,131 | 4,601 | 6,188 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of available-for-sale securities | — | (579 | ) | (5,070 | ) | |||||||
| Maturity of available-for-sale securities | 659 | 938 | 6,887 | |||||||||
| (Investments in subsidiaries) and return of capital from subsidiaries | (19,000 | ) | 3,500 | 3,500 | ||||||||
| Net cash (used in) provided by investing activities | (18,341 | ) | 3,859 | 5,317 | ||||||||
| Cash flows from financing activities: | ||||||||||||
| Net increase (decrease) in borrowings | (411 | ) | (1,197 | ) | 2,000 | |||||||
| Cash dividends paid on common stock | (3,166 | ) | (4,675 | ) | (4,885 | ) | ||||||
| Proceeds from exercise of stock options | 57 | 224 | 850 | |||||||||
| Proceeds from restricted stock | — | 25 | — | |||||||||
| Proceeds from issuance of preferred stock and warrants | 10,000 | — | — | |||||||||
| Cash dividends paid on preferred stock | (425 | ) | — | — | ||||||||
| Proceeds from issuance of shares from rights offering | 11,000 | — | — | |||||||||
| Purchase of treasury stock | — | (1,924 | ) | (10,027 | ) | |||||||
| Issuance cost of common stock | (11 | ) | (19 | ) | (21 | ) | ||||||
| Tax (expense) benefit from stock based compensation | (73 | ) | (78 | ) | 155 | |||||||
| Net cash provided (used in) financing activities | 16,971 | (7,644 | ) | (11,928 | ) | |||||||
| Increase (decrease) in cash and cash equivalents | 1,761 | 816 | (423 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 922 | 106 | 529 | |||||||||
| Cash and cash equivalents at the end of year | $ | 2,683 | $ | 922 | $ | 106 | ||||||
CENTER BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — Quarterly Financial Information of Center Bancorp, Inc. (Unaudited)
| | | | | ||||||||||||
| 2009 | ||||||||||||||||
| 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | |||||||||||||
| (Dollars in Thousands, Except per Share Data) | ||||||||||||||||
| Total interest income | $ | 12,971 | $ | 13,491 | $ | 12,706 | $ | 11,942 | ||||||||
| Total interest expense | 4,953 | 6,050 | 6,079 | 5,563 | ||||||||||||
| Net interest income | 8,018 | 7,441 | 6,627 | 6,379 | ||||||||||||
| Provision for loan losses | 1,404 | 280 | 156 | 1,421 | ||||||||||||
| Total other income, net of securities gains | 968 | 822 | 841 | 784 | ||||||||||||
| Net securities gains (losses) | (1,308 | ) | (511 | ) | 1,710 | 600 | ||||||||||
| Other expense | 5,238 | 5,186 | 7,314 | 5,319 | ||||||||||||
| Income before income taxes | 1,036 | 2,286 | 1,708 | 1,023 | ||||||||||||
| Provision for income taxes | (2 | ) | 751 | 507 | 224 | |||||||||||
| Net income | $ | 1,038 | $ | 1,535 | $ | 1,201 | $ | 799 | ||||||||
| Net income available to common stockholders | $ | 896 | $ | 1,387 | $ | 1,053 | $ | 670 | ||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.06 | $ | 0.11 | $ | 0.08 | $ | 0.05 | ||||||||
| Diluted | $ | 0.06 | $ | 0.11 | $ | 0.08 | $ | 0.05 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 14,531,387 | 13,000,601 | 12,994,429 | 12,991,312 | ||||||||||||
| Diluted | 14,534,255 | 13,005,101 | 12,996,544 | 12,993,185 | ||||||||||||
| | | | | ||||||||||||
| 2008 | ||||||||||||||||
| 4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | |||||||||||||
| (Dollars in Thousands, Except per Share Data) | ||||||||||||||||
| Total interest income | $ | 12,615 | $ | 12,689 | $ | 12,230 | $ | 12,360 | ||||||||
| Total interest expense | 5,792 | 5,829 | 5,801 | 6,673 | ||||||||||||
| Net interest income | 6,823 | 6,860 | 6,429 | 5,687 | ||||||||||||
| Provision for loan losses | 425 | 465 | 521 | 150 | ||||||||||||
| Total other income, net of securities gains | 871 | 1,122 | 891 | 866 | ||||||||||||
| Net securities gains (losses) | (256 | ) | (1,075 | ) | 225 | 0 | ||||||||||
| Other expense | 4,754 | 4,578 | 5,188 | 4,953 | ||||||||||||
| Income before income taxes | 2,259 | 1,864 | 1,836 | 1,450 | ||||||||||||
| Provision for income taxes | 560 | 346 | 428 | 233 | ||||||||||||
| Net income | $ | 1,699 | $ | 1,518 | $ | 1,408 | $ | 1,217 | ||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.13 | $ | 0.12 | $ | 0.11 | $ | 0.09 | ||||||||
| Diluted | $ | 0.13 | $ | 0.12 | $ | 0.11 | $ | 0.09 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 12,989,304 | 12,990,441 | 13,070,868 | 13,144,747 | ||||||||||||
| Diluted | 12,995,134 | 13,003,954 | 13,083,558 | 13,163,586 | ||||||||||||
Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by the Corporation in its Exchange Act reports is accumulated and communicated to management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of its management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, the Corporation evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of December 31, 2009. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of such date as described below in Management’s Report on Internal Control Over Financial Reporting (Item 9A(b)).
(b) Management’s Report on Internal Control Over Financial Reporting
The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act. The Corporation’s internal control system is a process designed to provide reasonable assurance to the Corporation’s management, Board of Directors and shareholders regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Corporation; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As part of the Corporation’s program to comply with Section 404 of the Sarbanes-Oxley Act of 2002, our management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006.2009 (the “Assessment”). In making this assessment,Assessment, management used the control criteria framework of the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission published in its report entitled Internal Control — Integrated Framework. Management’s assessmentAssessment included an evaluation of the design of the Corporation’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessmentAssessment with the Audit Committee.
Based on this assessment,Assessment, management determined that, as of December 31, 2006,2009, the Corporation’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
ParenteBeard LLC, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report on management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006.2009. The report, which expresses opinions on management’s assessment andan opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006,2009, is included in this item under the heading “Report of Independent Registered Public Accounting Firm.”
December 31, | |||||||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
ASSETS | |||||||
| Cash and due from banks (Note 6) | $ | 34,088 | $ | 19,343 | |||
| Federal funds sold and securities purchased under agreement to resell | 10,275 | — | |||||
| Total cash and cash equivalents | 44,363 | 19,343 | |||||
| Investment securities available-for-sale | 250,603 | 377,216 | |||||
| Investment securities held to maturity (approximate market value of $130,900 in 2006 and $140,628 in 2005) | 131,130 | 140,514 | |||||
| Total investment securities (Notes 7 and 10) | 381,733 | 517,730 | |||||
| Loans, net of unearned income (Note 8) | 550,414 | 505,826 | |||||
| Less – Allowance for loan losses (Note 8) | 4,960 | 4,937 | |||||
| Net loans | 545,454 | 500,889 | |||||
| Restricted investment in bank stocks, at cost | 7,805 | 10,954 | |||||
| Premises and equipment, net (Note 9) | 18,829 | 18,343 | |||||
| Accrued interest receivable | 4,932 | 5,875 | |||||
| Bank owned life insurance (Note 1) | 21,368 | 18,588 | |||||
| Other assets (Note 12) | 9,588 | 5,670 | |||||
| Goodwill and other intangible assets (Note 3) | 17,312 | 17,437 | |||||
Total assets | $ | 1,051,384 | $ | 1,114,829 | |||
LIABILITIES | |||||||
| Deposits: | |||||||
| Non-interest-bearing | $ | 136,453 | $ | 139,911 | |||
| Interest-bearing: | |||||||
| Time deposits $100 and over ( Note 16) | 83,623 | 154,409 | |||||
| Interest-bearing transaction, savings and time deposits $100 and less | 506,695 | 406,281 | |||||
| Total deposits | 726,771 | 700,601 | |||||
| Overnight Federal funds and securities sold under agreement to repurchase (Note 10) | 29,443 | 98,193 | |||||
| Short-term borrowings (Note 10) | 2,000 | 23,900 | |||||
| Long-term borrowings (Note 10) | 174,991 | 171,870 | |||||
| Subordinated debentures (Note 14) | 5,155 | 15,465 | |||||
| Accounts payable and accrued liabilities (Notes 11 and 12) | 15,411 | 5,311 | |||||
| Total liabilities | 953,771 | 1,015,340 | |||||
Commitments and contingencies (Note 19) | |||||||
STOCKHOLDERS’ EQUITY (Notes 2, 5, 13 and 18) | |||||||
| Preferred Stock, no par value: | |||||||
| Authorized 5,000,000 shares; none issued | — | — | |||||
| Common stock, no par value: | |||||||
| Authorized 20,000,000 shares; issued 14,467,962 shares at December 31, 2006 and 2005; outstanding 13,248,406 and 13,431,628 shares at December 31, 2006 and 2005, respectively | 65,592 | 65,592 | |||||
| Additional paid-in capital | 4,535 | 3,787 | |||||
| Retained earnings | 37,527 | 38,453 | |||||
| Treasury stock, at cost (1,219,556 and 1,036,334 shares in 2006 and 2005, respectively) | (6,631 | ) | (3,701 | ) | |||
| Accumulated other comprehensive loss | (3,410 | ) | (4,642) | ||||
Total stockholders’ equity | 97,613 | 99,489 | |||||
Total liabilities and stockholders’ equity | $ | 1,051,384 | $ | 1,114,829 | |||
Years Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands, Except Per Share Data) | ||||||||||
| Interest income: | ||||||||||
| Interest and fees on loans | $ | 31,999 | $ | 25,329 | $ | 18,529 | ||||
| Interest and dividends on investment securities: | ||||||||||
| Taxable interest income | 15,521 | 18,849 | 16,459 | |||||||
| Non-taxable interest income | 3,874 | 4,001 | 3,596 | |||||||
| Dividends | 1,384 | 2,295 | 1,465 | |||||||
| Interest on federal funds sold and securities purchased under agreement to resell | 547 | 29 | — | |||||||
| Total interest income | 53,325 | 50,503 | 40,049 | |||||||
| Interest expense: | ||||||||||
| Interest on certificates of deposit $100 and over | 4,930 | 3,828 | 1,278 | |||||||
| Interest on other deposits | 13,075 | 7,771 | 6,137 | |||||||
| Interest on borrowings | 10,969 | 11,697 | 6,553 | |||||||
| Total interest expense | 28,974 | 23,296 | 13,968 | |||||||
| Net interest income | 24,351 | 27,207 | 26,081 | |||||||
| Provision for loan losses (Note 8) | 57 | — | 752 | |||||||
| Net interest income, after provision for loan losses | 24,294 | 27,207 | 25,329 | |||||||
| Other income: | ||||||||||
| Service charges, commissions and fees | 1,759 | 1,922 | 1,948 | |||||||
| Other income | 454 | 631 | 499 | |||||||
| Annuity and Insurance | 205 | 193 | 59 | |||||||
| Bank owned life insurance (Note 1) | 780 | 740 | 734 | |||||||
| Net gain (loss) on securities sold (Note 7) | (2,565 | ) | 350 | 148 | ||||||
| Total other income | 633 | 3,836 | 3,388 | |||||||
| Other expense: | ||||||||||
| Salaries and employee benefits (Note 11 and 2) | 12,290 | 12,108 | 10,140 | |||||||
| Occupancy, net (Note 9) | 2,309 | 2,165 | 1,943 | |||||||
| Premises and equipment (Notes 9 and 19) | 1,940 | 1,990 | 1,852 | |||||||
| Stationery and printing | 692 | 628 | 539 | |||||||
| Marketing and advertising | 731 | 644 | 529 | |||||||
| Computer expense | 741 | 594 | 451 | |||||||
| Other | 5,655 | 4,084 | 4,017 | |||||||
| Total other expense | 24,358 | 22,213 | 19,471 | |||||||
| Income before income tax expense (benefit) | 569 | 8,830 | 9,246 | |||||||
| Income tax expense (benefit) (Note 12) | (3,329 | ) | 1,184 | 1,624 | ||||||
| Net income | $ | 3,898 | $ | 7,646 | $ | 7,622 | ||||
| Earnings per share: (Note 10) | ||||||||||
| Basic | $ | .29 | $ | .63 | $ | .79 | ||||
| Diluted | $ | .29 | $ | .63 | $ | .78 | ||||
| Weighted average common shares outstanding: | ||||||||||
| Basic | 13,294,937 | 12,074,870 | 9,679,880 | |||||||
| Diluted | 13,371,750 | 12,119,291 | 9,737,706 | |||||||
Years Ended December 31, 2006, 2005, and 2004 | ||||||||||||||||||||||
Common Stock Amount | Additional Paid In Capital | Retained Earnings | Treasury Stock | Restricted Stock | Accumulated Other Comprehensive Income (Loss) | Total Stock- holders’ Equity | ||||||||||||||||
| (In Thousands, Except Share Data) | ||||||||||||||||||||||
Balance, December 31, 2003 | $ | 19,405 | $ | 4,677 | $ | 33,268 | $ | (3,978 | ) | $ | (14 | ) | $ | 822 | $ | 54,180 | ||||||
| Cash dividends declared ($0.34 per share) | (3,238 | ) | (3,238 | ) | ||||||||||||||||||
| Private Placement: Common stock | 10,631 | (542 | ) | (679 | ) | 9,410 | ||||||||||||||||
| Issuance of common stock | 405 | 405 | ||||||||||||||||||||
| Exercise of stock options | 342 | 203 | 545 | |||||||||||||||||||
| Restricted stock award | 14 | 14 | ||||||||||||||||||||
| Net income | 7,622 | 7,622 | ||||||||||||||||||||
| Other comprehensive (loss) | (295 | ) | (295 | ) | ||||||||||||||||||
Balance, December 31, 2004 | $ | 30,441 | $ | 4,477 | $ | 36,973 | $ | (3,775 | ) | $ | 0 | $ | 527 | $ | 68,643 | |||||||
| Cash dividends declared ($0.36 per share) | (4,518 | ) | (4,518 | ) | ||||||||||||||||||
| Private Placement: Common stock | 21,619 | (1,120 | ) | (1,621 | ) | 18,878 | ||||||||||||||||
| Issuance of common stock | 255 | (27 | ) | 228 | ||||||||||||||||||
| Exercise of stock option | 355 | 44 | 399 | |||||||||||||||||||
| Common stock issued in Red Oak Bank Acquisition | 13,277 | 13,277 | ||||||||||||||||||||
| Restricted stock award | 75 | 30 | 105 | |||||||||||||||||||
| Net income | 7,646 | 7,646 | ||||||||||||||||||||
| Other comprehensive (loss) | (5,169 | ) | (5,169 | ) | ||||||||||||||||||
Balance, December 31, 2005 | $ | 65,592 | $ | 3,787 | $ | 38,453 | $ | (3,701 | ) | $ | 0 | $ | (4,642 | ) | $ | 99,489 | ||||||
| Cash dividends declared ($0.36 per share) | (4,808 | ) | (4,808 | ) | ||||||||||||||||||
| Purchase of treasury stock | (3,366) | (3,366 | ) | |||||||||||||||||||
| Issuance of common stock | (16 | ) | (16 | ) | ||||||||||||||||||
| Exercise of stock option | 238 | 436 | 674 | |||||||||||||||||||
| Net impact to initially apply SFAS No. 158, net of income tax of ($543) | (815 | ) | (815 | ) | ||||||||||||||||||
| Stock based compensation | 160 | 160 | ||||||||||||||||||||
| Tax benefit related to stock based-compensation | 350 | 350 | ||||||||||||||||||||
| Net income | 3,898 | 3,898 | ||||||||||||||||||||
| Other comprehensive income | 2,047 | 2,047 | ||||||||||||||||||||
Balance, December 31, 2006 | $ | 65,592 | $ | 4,535 | $ | 37,527 | $ | (6,631 | ) | $ | 0 | $ | (3,410 | ) | $ | 97,613 | ||||||
Years Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
| (Dollars In Thousands) | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
| Net income | $ | 3,898 | $ | 7,646 | $ | 7,622 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||||
| Depreciation and amortization | 1,852 | 1,827 | 1,580 | |||||||
| Provision for loan losses | 57 | — | 752 | |||||||
| Provision for deferred taxes | 5,280 | 4,628 | 106 | |||||||
| Stock-based compensation expense | 160 | — | — | |||||||
| Net losses (gains) on sale of investment securities available-for-sale | 2,660 | (350 | ) | (148 | ) | |||||
| Net gains on sale of investment securities held-to-maturity | (95 | ) | — | — | ||||||
| Decrease (increase) in accrued interest receivable | 943 | (1,342 | ) | (48 | ) | |||||
| Increase in other assets | (9,519 | ) | (3,097 | ) | (890 | ) | ||||
| Increase (decrease) in other liabilities | 881 | (1,758 | ) | 1,279 | ||||||
| Increase in cash surrender value of bank owned life insurance | (780 | ) | (740 | ) | (734 | ) | ||||
| Amortization of premium and accretion of discount on investment securities, net | 210 | 452 | 656 | |||||||
Net cash provided by operating activities | 5,547 | 7,266 | 10,175 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
| Proceeds from maturities of investment securities available-for-sale | 220,415 | 300,541 | 149,951 | |||||||
| Proceeds from maturities, calls and paydowns of securities held to maturity | 10,793 | 32,315 | 37,902 | |||||||
| Net (purchases) sales of restricted investment in bank stock | 3,149 | (3,589 | ) | (200 | ) | |||||
| Proceeds from sales of investment securities available-for-sale | 188,018 | 59,427 | 52,524 | |||||||
| Proceeds from sales of investment securities held to maturity | 517 | — | — | |||||||
| Purchase of securities available-for-sale | (273,744 | ) | (297,133 | ) | (292,397 | ) | ||||
| Purchase of securities held to maturity | (2,000 | ) | (44,089 | ) | (7,445 | ) | ||||
| Net increase in loans | (44,622 | ) | (37,741 | ) | (27,000 | ) | ||||
| Property and equipment expenditures, net | (2,218 | ) | (1,997 | ) | (3,592 | ) | ||||
| Cash consideration paid to acquire Red Oak Bank | — | (13,279 | ) | — | ||||||
| Cash and cash equivalents acquired from Red Oak Bank | — | 2,433 | — | |||||||
| Purchase of bank owned life insurance | (2,000 | ) | — | (2,500 | ) | |||||
Net cash provided by (used in) investing activities | 98,308 | (3,112 | ) | (92,757 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
| Net (decrease) increase in deposits | 26,170 | (72,346 | ) | 69,351 | ||||||
| Net (decrease) increase in short-term borrowings | (13,102 | ) | 26,735 | 1,633 | ||||||
| Proceeds from FHLB advances | 20,000 | 192,439 | 50,000 | |||||||
| Payment on FHLB advances | (94,427 | ) | (158,659 | ) | (50,000 | ) | ||||
| Redemption of subordinated debentures | (10,310 | ) | — | — | ||||||
| Dividends paid | (4,808 | ) | (4,518 | ) | (3,238 | ) | ||||
| Proceeds from issuance of common stock | (16 | ) | 19,106 | 10,360 | ||||||
| Tax benefits from stock based compensation | 350 | — | — | |||||||
| Exercise of stock options | 674 | 399 | — | |||||||
| Purchase of treasury stock | (3,366 | ) | — | — | ||||||
Net cash (used in) provided by financing activities | (78,835 | ) | 3,156 | 78,106 | ||||||
| Net increase (decrease) in cash and cash equivalents | 25,020 | 7,310 | (4,476 | ) | ||||||
| Cash and cash equivalents at beginning of year | 19,343 | 12,033 | 16,509 | |||||||
| Cash and cash equivalents at end of year | $ | 44,363 | $ | 19,343 | $ | 12,033 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||
| Noncash investment activities: | ||||||||||
| Trade date accounting settlement for investments | $ | 8,083 | $ | — | $ | — | ||||
| Cash paid during year for: | ||||||||||
| Interest paid on deposits and borrowings | $ | 28,594 | $ | 23,228 | $ | 13,921 | ||||
| Income taxes | $ | 297 | $ | 1,221 | $ | 1,650 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AT DATE OF ACQUISITION: | ||||||||||
| Fair Value of assets acquired | $ | — | $ | 115,307 | $ | — | ||||
| Goodwill and deposit intangible | $ | — | $ | 15,416 | $ | — | ||||
| Liabilities assumed | $ | — | $ | 88,556 | $ | — | ||||
| Common stock issued for the Red Oak Bank acquisition, net | $ | — | $ | 13,277 | $ | — | ||||
The consolidated financial statements of Center Bancorp, Inc. (the “Parent Corporation”) are prepared on the accrual basis and include the accounts of the Parent Corporation and its wholly owned subsidiary, Union Center National Bank (the “Bank” and collectively with the Parent Corporation and its other direct and indirect subsidiaries, the “Corporation”). All significant inter-company accounts and transactions have been eliminated from the accompanying consolidated financial statements.
Years Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
| (In Thousands, Except Per Share Amounts) | ||||||||||
| Net income | $ | 3,898 | $ | 7,646 | $ | 7,622 | ||||
| Average number of common shares outstanding | 13,295 | 12,075 | 9,680 | |||||||
| Effect of dilutive options | 77 | 44 | 57 | |||||||
| Effect of restricted stock awards | 0 | 0 | 1 | |||||||
| Average number of common shares outstanding used to calculate diluted earnings per common share | 13,372 | 12,119 | 9,738 | |||||||
| Net income per share | ||||||||||
| Basic | $ | .29 | $ | .63 | $ | .79 | ||||
| Diluted | $ | .29 | $ | .63 | $ | .78 | ||||
Years Ended December 31, | |||||||
2005 | 2004 | ||||||
| (In Thousands, Except Per Share Amounts) | |||||||
| Net Income, as reported | $ | 7,646 | $ | 7,622 | |||
| Add: compensation expense recognized for restricted stock award, net of related tax effect | $ | 69 | $ | 9 | |||
| Deduct: Total Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | 462 | 101 | |||||
| Pro forma net income | $ | 7,253 | $ | 7,530 | |||
| Earnings per share: | |||||||
| Basic – as reported | $ | .63 | $ | .79 | |||
| Basic – pro forma | $ | .60 | $ | .78 | |||
| Diluted – as reported | $ | .63 | $ | .78 | |||
| Diluted – pro forma | $ | .60 | $ | .77 | |||
December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||||
| Weighted average fair value of grants | $ | 5.53 | $ | 4.07 | $ | 3.43 | ||||||||
| Risk-free interest rate | 5.03 | % | 3.90 | % | 4.11 | % | ||||||||
| Dividend yield | 2.70 | % | 3.08 | % | 2.73 | % | ||||||||
| Expected volatility | 49.5 | % | 30.1 | % | 35.8 | % | ||||||||
| Expected life in months | 72 | 72 | 72 |
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||
| (In Thousands) | (In Years) | (In Thousands) | |||||||||
| Outstanding at December 31, 2005 | 377,894 | $ | 5.41-15.88 | $ | 2,282 | ||||||
| Granted | 31,500 | 13.17 | 83 | ||||||||
| Exercised | 86,356 | 5.41-11.19 | 598 | ||||||||
| Forfeited/cancelled/expired | — | — | — | ||||||||
| Outstanding at December 31, 2006 | 323,038 | $ | 5.41-15.88 | 10.65 | $ | 1,673 | |||||
| Exercisable at December 31, 2006 | 250,978 | $ | 6.37-15.88 | 6.23 | $ | 1,399 | |||||
Stock Option Plan | Shares | Exercise Price Range Per Share | |||||
60; | |||||||
| Outstanding, December 31, 2003 (176,867 shares exercisable) | 261,503 | $ | 4.51 to | $15.88 | |||
| Granted during 2004 | 34,650 | $11.03 | |||||
| Exercised during 2004 | (55,135 | ) | $ | 4.51 to | $6.37 | ||
| Expired or canceled during 2004 | (3,835 | ) | $6.37 | ||||
| Outstanding, December 31, 2004 (170,059 shares exercisable) | 237,183 | $ | 4.51 to | $15.88 | |||
| Granted during 2005 | 152,854 | $ | 6.42 to | $11.19 | |||
| Exercised during 2005 | (12,138 | ) | $ | 4.51 to | $6.38 | ||
| Expired or canceled during 2005 | (5 | ) | $6.37 | ||||
| Outstanding, December 31, 2005 (308,520 shares exercisable) | 377,894 | $ | 5.41 to | $15.88 | |||
| Granted during 2006 | 31,500 | $13.17 | |||||
| Exercised during 2006 | (86,356 | ) | $ | 5.41 to | $11.19 | ||
| Expired or canceled during 2006 | — | — | |||||
| Outstanding, December 31, 2006 (250,978 shares exercisable) | 323,038 | $ | 5.41 to | $15.88 | |||
2006 | 2005 | 2004 | |||||||||||||
Options Granted | Weighted Average Fair Value | Options Granted | Weighted Average Fair Value | Options Granted | Weighted Average Fair Value | ||||||||||
| Incentive stock options | — | $ | — | 54,514 | $ | 4.98 | — | $ | — | ||||||
| Non-qualifying stock options | — | $ | — | 65,260 | $ | 3.28 | — | $ | — | ||||||
| Director’s plan | 31,500 | $ | 5.53 | 33,080 | $ | 3.28 | 34,650 | $ | 3.43 | ||||||
| Total | 31,500 | $ | 5.53 | 152,854 | $ | 4.07 | 34,650 | $ | 3.43 | ||||||
| (Dollars in Thousands) | |||||
| Balance as of December 31, 2004 | $ | 2,091 | |||
| Acquisition activity | 14,713 | ||||
| Balance as of December 31, 2005 | 16,804 | ||||
| Acquisition activity | — | ||||
| Balance as of December 31, 2006 | $ | 16,804 |
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| (Dollars in Thousands) | |||||||||||
As of December 31, 2006: | |||||||||||
| Core deposits | $ | 703 | $ | (195 | ) | $ | 508 | ||||
| Other | 5 | (5 | ) | 0 | |||||||
| Total intangible assets | 708 | (200 | ) | 508 | |||||||
As of December 31, 2005: | |||||||||||
| Core deposits | 703 | (75 | ) | 628 | |||||||
| Other | 24 | (19 | ) | 5 | |||||||
| Total intangible assets | $ | 727 | $ | (94 | ) | $ | 633 | ||||
At May 20, 2005 | ||||||
| (Dollars in Thousands) | ||||||
ASSETS | ||||||
| Cash and due from banks | $ | 2,433 | ||||
| Securities | 5,404 | |||||
| Loans, net | 89,626 | |||||
| Fixed assets | 476 | |||||
| Other assets | 1,952 | |||||
| Core deposit intangible | 703 | |||||
| Goodwill | 14,713 | |||||
| Total assets | 115,307 | |||||
LIABILITIES | ||||||
| Deposits | 70,674 | |||||
| Borrowings | 17,090 | |||||
| Other liabilities | 792 | |||||
| Total liabilities | 88,556 | |||||
| Net assets acquired | $ | 26,751 |
Before Tax Amount | Tax Benefit (Expense) | Net of Tax Amount | ||||||||
| (Dollars in Thousands) | ||||||||||
For the year ended 2006: | ||||||||||
| Net unrealized gains on available for sale securities | ||||||||||
| Net unrealized holding gains arising during period | $ | (16 | ) | $ | 6 | $ | (10 | ) | ||
| Less reclassification adjustment for net losses arising during the period | (2,565 | ) | (640 | ) | (1,925 | ) | ||||
| Net unrealized gains | $ | 2,549 | $ | (634 | ) | $ | 1,915 | |||
| Change in minimum pension liability | 219 | (87 | ) | 132 | ||||||
| Other comprehensive income, net | $ | 2,768 | $ | (721 | ) | $ | 2,047 | |||
For the year ended 2005: | ||||||||||
| Net unrealized losses on available for sale securities | ||||||||||
| Net unrealized holding losses arising during period | $ | (7,981 | ) | $ | 2,752 | $ | (5,229 | ) | ||
| Less reclassification adjustment for net gains arising during the period | 350 | (119 | ) | 231 | ||||||
| Net unrealized losses | (7,631 | ) | 2,633 | (4,998 | ) | |||||
| Change in minimum pension liability | (171 | ) | 0 | (171 | ) | |||||
| Other comprehensive loss, net | $ | (7,802 | ) | $ | 2,633 | $ | (5,169 | ) | ||
Before Tax Amount | Tax Benefit (Expense) | Net of Tax Amount | ||||||||
| (Dollars in Thousands) | ||||||||||
For the year ended 2004: | ||||||||||
| Net unrealized losses on available for sale securities | ||||||||||
| Net unrealized holding losses arising during period | $ | (509 | ) | $ | 173 | $ | (336 | ) | ||
| Less reclassification adjustment for net gains arising during the period | 148 | (50 | ) | 98 | ||||||
| Net unrealized losses | (361 | ) | 123 | (238 | ) | |||||
| Change in minimum pension liability | (57 | ) | 0 | (57 | ) | |||||
| Other comprehensive loss, net | $ | (418 | ) | $ | 123 | $ | (295 | ) | ||
December 31, 2006 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
| (Dollars in Thousands) | |||||||||||||
Securities Held-to-Maturity: | |||||||||||||
| U.S. Treasury and Agency Securities | $ | 511 | $ | 18 | $ | — | $ | 529 | |||||
| Federal Agency Obligations | 30,056 | 17 | 531 | 29,542 | |||||||||
| Obligations of U.S. States and political subdivisions | 58,780 | 549 | 348 | 58,981 | |||||||||
| Other debt securities | 41,783 | 815 | 750 | 41,848 | |||||||||
| $ | 131,130 | $ | 1,399 | $ | 1,629 | $ | 130,900 | ||||||
December 31, 2006 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
| (Dollars in Thousands) | |||||||||||||
Securities Available-for-Sale: | |||||||||||||
| U.S. Treasury and Agency Securities | $ | 100 | $ | — | $ | — | $ | 100 | |||||
| Federal Agency Obligations | 107,343 | — | 3,694 | 103,649 | |||||||||
| Obligations of U.S. States and political subdivisions | 28,202 | 32 | 578 | 27,656 | |||||||||
| Other debt securities | 98,502 | 253 | 916 | 97,839 | |||||||||
| Other equity securities | 20,648 | 711 | — | 21,359 | |||||||||
| $ | 254,795 | $ | 996 | $ | 5,188 | $ | 250,603 | ||||||
December 31, 2005 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
| (Dollars in Thousands) | |||||||||||||
Securities Held-to-Maturity: | |||||||||||||
| U.S. Treasury and Agency Securities | $ | 1,122 | $ | 56 | $ | — | $ | 1,178 | |||||
| Federal Agency Obligations | 33,577 | 91 | 443 | 33,225 | |||||||||
| Obligations of U.S. States and political subdivisions | 60,004 | 542 | 747 | 59,799 | |||||||||
| Other debt securities | 45,811 | 1,219 | 604 | 46,426 | |||||||||
| $ | 140,514 | $ | 1,908 | $ | 1,794 | $ | 140,628 | ||||||
December 31, 2005 | |||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||
| (Dollars in Thousands) | |||||||||||||
Securities Available-for-Sale: | |||||||||||||
| U.S. Treasury and Agency Securities | $ | 588 | $ | — | $ | 6 | $ | 582 | |||||
| Federal Agency Obligations | 215,257 | — | 5,878 | 209,379 | |||||||||
| Obligations of U.S. States and political subdivisions | 45,574 | 140 | 909 | 44,805 | |||||||||
| Other debt securities | 107,786 | 778 | 1,012 | 107,552 | |||||||||
| Other equity securities | 14,752 | 238 | 92 | 14,898 | |||||||||
| $ | 383,957 | $ | 1,156 | $ | 7,897 | $ | 377,216 | ||||||
Held-to-Maturity | Available-for-Sale | ||||||||||||
Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | ||||||||||
| (Dollars in Thousands) | |||||||||||||
| Due in one year or less | $ | 11 | $ | 11 | $ | 41,372 | $ | 41,692 | |||||
| Due after one year through five years | 13,578 | 13,657 | 28,526 | 28,404 | |||||||||
| Due after five years through ten years | 38,130 | 37,692 | 46,811 | 45,545 | |||||||||
| Due after ten years | 79,411 | 79,540 | 138,086 | 134,962 | |||||||||
| Total | $ | 131,130 | $ | 130,900 | $ | 254,795 | $ | 250,603 | |||||
December 31, 2006 | |||||||||||||||||||
Total | Less Than 12 Months | 12 Months or Longer | |||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
Held-to-Maturity: | |||||||||||||||||||
| U.S. Treasury obligations and direct obligations of US government | $ | 15,223 | $ | (375 | ) | $ | — | $ | — | $ | 15,223 | $ | (375 | ) | |||||
| Federal agency CMO’s | 29,993 | (770 | ) | 6,959 | (4 | ) | 23,034 | (766 | ) | ||||||||||
| Federal agency MBS’s | 539 | (2 | ) | 539 | (2 | ) | — | — | |||||||||||
| Corporate bonds | 5,899 | (135 | ) | — | — | 5,899 | (135 | ) | |||||||||||
| Municipal tax exempt obligations | 23,627 | (347 | ) | 4,231 | (16 | ) | 19,396 | (331 | ) | ||||||||||
| Other equity securities | — | — | — | — | — | — | |||||||||||||
| Total temporarily impaired securities | $ | 75,281 | $ | (1,629 | ) | $ | 11,729 | $ | (22 | ) | $ | 63,552 | $ | (1,607 | ) | ||||
December 31, 2006 | |||||||||||||||||||
Total | Less Than 12 Months | 12 Months or Longer | |||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
Available-for-Sale: | |||||||||||||||||||
| U.S. Treasury obligations and direct obligations of US government | $ | 8,863 | $ | (406 | ) | $ | 100 | $ | — | $ | 8,763 | $ | (406 | ) | |||||
| Federal agency CMO’s | 101,331 | (3,512 | ) | 1,751 | (40 | ) | 99,580 | (3,472 | ) | ||||||||||
| Federal agency MBS’s | 15,578 | (505 | ) | — | — | 15,578 | (505 | ) | |||||||||||
| Corporate bonds | 12,081 | (187 | ) | 7,137 | (74 | ) | 4,944 | (113 | ) | ||||||||||
| Municipal tax exempt obligations | 23,019 | (578 | ) | 2,565 | (4 | ) | 20,454 | (574 | ) | ||||||||||
| Other equity securities | — | — | — | — | — | — | |||||||||||||
| Total temporarily impaired securities | $ | 160,872 | $ | (5,188 | ) | $ | 11,553 | $ | (118 | ) | $ | 149,319 | $ | (5,070 | ) | ||||
December 31, 2005 | |||||||||||||||||||
Total | Less Than 12 Months | 12 Months or Longer | |||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
Held-to-Maturity: | |||||||||||||||||||
| U.S. Treasury obligations and direct obligations of U.S. government | $ | 15,303 | $ | (318 | ) | $ | 8,074 | $ | (72 | ) | $ | 7,229 | $ | (246 | ) | ||||
| Federal agency CMO’s | 27,233 | (666 | ) | 22,113 | (512 | ) | 5,120 | (154 | ) | ||||||||||
| Federal agency MBS’s | — | — | — | — | — | — | |||||||||||||
| Corporate bonds | 5,973 | (63 | ) | 4,026 | (13 | ) | 1,947 | (50 | ) | ||||||||||
| Municipal tax exempt obligations | 33,967 | (747 | ) | 21,641 | (318 | ) | 12,326 | (429 | ) | ||||||||||
| Total temporarily impaired securities | $ | 82,476 | $ | (1,794 | ) | $ | 55,854 | $ | (915 | ) | $ | 26,622 | $ | (879 | ) | ||||
December 31, 2005 | |||||||||||||||||||
Total | Less Than 12 Months | 12 Months or Longer | |||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
Available-for-Sale | |||||||||||||||||||
| U.S. Treasury obligations and direct obligations of US government | $ | 17,847 | $ | (547 | ) | $ | 7,161 | $ | (82 | ) | $ | 10,686 | $ | (465 | ) | ||||
| Federal agency CMO’s | 172,355 | (4,691 | ) | 62,255 | (1,216 | ) | 110,100 | (3,475 | ) | ||||||||||
| Federal agency MBS’s | 49,261 | (1,474 | ) | 26,909 | (580 | ) | 22,352 | (894 | ) | ||||||||||
| Asset backed securities | 24,030 | (38 | ) | 24,030 | (38 | ) | — | — | |||||||||||
| Corporate bonds | 6,478 | (146 | ) | 4,054 | (71 | ) | 2,424 | (75 | ) | ||||||||||
| Municipal tax exempt obligations | 27,401 | (909 | ) | 9,753 | (160 | ) | 17,648 | (749 | ) | ||||||||||
| Other equity securities | 1,716 | (92 | ) | 1,716 | (92 | ) | — | — | |||||||||||
| Total temporarily impaired securities | $ | 299,088 | $ | (7,897 | ) | $ | 135,878 | $ | (2,239 | ) | $ | 163,210 | $ | (5,658 | ) | ||||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
| Real estate – residential mortgage | $ | 269,486 | $ | 261,028 | |||
| Real estate – commercial | 206,044 | 164,841 | |||||
| Commercial and industrial | 74,179 | 79,006 | |||||
| Installment | 705 | 951 | |||||
| Total | $ | 550,414 | $ | 505,826 | |||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Balance at the beginning of year | $ | 4,937 | $ | 3,781 | $ | 3,002 | ||||
| Provision for loan losses | 57 | — | 752 | |||||||
| Addition of Red Oak Bank’s Allowance – May 20, 2005 | — | 1,210 | — | |||||||
| Loans charged-off | (79 | ) | (82 | ) | (11 | ) | ||||
| Recoveries on loans previously charged-off | 45 | 28 | 38 | |||||||
| Balance at the end of year | $ | 4,960 | $ | 4,937 | $ | 3,781 | ||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Loans past due in excess of 90 days and still accruing | $ | 225 | $ | 179 | $ | — | ||||
| Non-accrual loans | 475 | 387 | — | |||||||
| Other real estate owned | — | — | — | |||||||
| Total non-performing assets | $ | 700 | $ | 566 | $ | — | ||||
Estimated Useful Life | 2006 | 2005 | |||||||
| (Dollars in Thousands) | |||||||||
| Land | $ | 3,447 | $ | 3,447 | |||||
| Buildings | 5-40 Yrs | 14,208 | 13,773 | ||||||
| Furniture, fixtures and equipment | 2-20 Yrs | 15,406 | 14,079 | ||||||
| Leasehold improvements | 5-30 Yrs | 2,130 | 1,812 | ||||||
| Subtotal | 35,191 | 33,111 | |||||||
| Less accumulated depreciation and amortization | 16,362 | 14,768 | |||||||
| Total | $ | 18,829 | $ | 18,343 | |||||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
| Overnight Federal Funds Purchased | $ | 0 | $ | 40,000 | |||
| Securities sold under agreements to repurchase | 29,443 | 58,193 | |||||
| Federal Home Loan Bank short-term and overnight advances | 2,000 | 23,900 | |||||
| Total Short-Term Borrowings | $ | 31,443 | $ | 122,093 | |||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
| Federal Home Loan Bank Advances | $ | 106,991 | $ | 154,370 | |||
| Securities sold under agreements to repurchase | 68,000 | 17,500 | |||||
| Total Long-Term Borrowings | $ | 174,991 | $ | 171,870 | |||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
| 2006 | $ | — | $ | 3,000 | |||
| 2007 | 2,000 | 2,000 | |||||
| 2008 | 1,422 | 1,644 | |||||
| 2009 | — | 25,000 | |||||
| 2010 | 50,569 | 65,726 | |||||
| 2011 | 10,000 | 10,000 | |||||
| 2012 | 5,000 | 5,000 | |||||
| 2015 | 20,000 | 45,000 | |||||
| 2016 | 20,000 | — | |||||
| Total: | $ | 108,991 | $ | 157,370 | |||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
| 2008 | $ | — | $ | 17,500 | |||
| 2011 | 27,000 | — | |||||
| 2013 | 41,000 | — | |||||
| Total: | $ | 68,000 | $ | 17,500 | |||
Change in Benefit Obligation | 2006 | 2005 | |||||
| (Dollars in Thousands) | |||||||
| Projected benefit obligation at beginning of year | $ | 10,797 | $ | 10,146 | |||
| Service cost | 976 | 776 | |||||
| Interest cost | 621 | 599 | |||||
| Actuarial loss (gain) | 875 | (444 | ) | ||||
| Benefits paid | (366 | ) | (280 | ) | |||
| Projected benefit obligation at end of year | $ | 12,903 | $ | 10,797 | |||
| Change in Plan Assets | |||||||
| Fair value of plan assets at beginning year | $ | 7,332 | $ | 6,599 | |||
| Actual return on plan assets | 1,084 | 313 | |||||
| Employer contributions | 750 | 700 | |||||
| Benefits paid | (366 | ) | (280 | ) | |||
| Fair value of plan assets at end of year | $ | 8,800 | $ | 7,332 | |||
| Funded status | $ | (4,103 | ) | $ | (3,465 | ) | |
| Unrecognized net asset | — | — | |||||
| Unrecognized prior service cost | 27 | 36 | |||||
| Unrecognized net actuarial loss | 1,493 | 1,248 | |||||
| Accrued benefit cost | $ | (2,583 | ) | $ | (2,181 | ) | |
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Service cost | $ | 1,000 | $ | 796 | $ | 725 | ||||
| Interest cost | 621 | 599 | 561 | |||||||
| Expected return on plan assets | (592 | ) | (533 | ) | (442 | ) | ||||
| Net amortization and deferral | 124 | 91 | 97 | |||||||
| Net periodic pension expense | $ | 1,153 | $ | 953 | $ | 941 | ||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Discount rate | 5.75 | % | 5.75 | % | 6.00 | % | ||||
| Rate of compensation increase | 4.25 | % | 4.25 | % | 4.50 | % | ||||
| Expected long-term rate of return on plan assets | 7.50 | % | 7.50 | % | 7.50 | % | ||||
Before Application of SFAS No. 158 | Adjustment | After Application of SFAS No. 158 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Financial statement line item: | ||||||||||
| Reserve for income taxes | $ | 2,888 | (543 | ) | $ | 2,345 | ||||
| Liability for pension benefits | 1,209 | 1,358 | 2,567 | |||||||
| Total other liabilities | 14,596 | 815 | 15,411 | |||||||
| Accumulated other comprehensive loss | (2,595 | ) | (815 | ) | (3,410 | ) | ||||
| Total stockholders’ equity | $ | 98,428 | (815 | ) | $ | 97,613 | ||||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
Information for Plans With an Accumulated Benefit Obligation in Excess of Plan Assets | |||||||
| Projected benefit obligation | $ | 12,903 | $ | 10,797 | |||
| Accumulated benefit obligation | 10,684 | 8,962 | |||||
| Fair value of plan assets | 8,800 | 7,332 | |||||
Assumptions | |||||||
Weighted average assumptions used to determine benefit obligation at December 31 | |||||||
| Discount rate | 5.75 | % | 5.75 | % | |||
| Rate of compensation increase | 4.25 | % | 4.25 | % | |||
Weighted average assumptions used to determine Net periodic benefit cost for years ended December 31 | |||||||
| Discount rate | 5.75 | % | 6.00 | % | |||
| Expected long-term return on plan assets | 7.50 | % | 7.50 | % | |||
| Rate of compensation increase | 4.25 | % | 4.50 | % | |||
Asset Category | 2006 | 2005 | 2004 | |||||||
| Equity securities | 79 | % | 76 | % | 79 | % | ||||
| Debt and/or fixed income securities | 21 | % | 23 | % | 20 | % | ||||
| Other | 0 | % | 1 | % | 1 | % | ||||
| Total | 100 | % | 100 | % | 100 | % | ||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
Current: | ||||||||||
| Federal | $ | (6,553 | ) | $ | (2,266 | ) | $ | 1,354 | ||
| State | (2,056 | ) | (1,178 | ) | 164 | |||||
| (8,609 | ) | (3,444 | ) | 1,518 | ||||||
Deferred: | ||||||||||
| Federal | 4,090 | 3,778 | 341 | |||||||
| State | 1,190 | 850 | (235 | ) | ||||||
| 5,280 | 4,628 | 106 | ||||||||
| Income tax expense (benefit) | $ | (3,329 | ) | $ | 1,184 | $ | 1,624 | |||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Income before income tax expense | $ | 569 | $ | 8,830 | $ | 9,246 | ||||
| Federal statutory rate | 34 | % | 34 | % | 34 | % | ||||
| Computer “expected” Federal income tax expense | 193 | 3,002 | 3,144 | |||||||
| State tax net of Federal tax benefit | (572 | ) | (216 | ) | (47 | ) | ||||
| Bank owned life insurance | (265 | ) | (252 | ) | (249 | ) | ||||
| Tax-exempt interest and dividends | (1,332 | ) | (1,206 | ) | (1,235 | ) | ||||
| Business entity restructuring | (1,400 | ) | — | — | ||||||
| Other, net | 47 | (144 | ) | 11 | ||||||
| Income tax expense | $ | (3,329 | ) | $ | 1,184 | $ | 1,624 | |||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
Deferred tax assets: | |||||||
| Allowance for loan losses | $ | 1,600 | $ | 1,550 | |||
| Employee benefit plans | 1,394 | 1,265 | |||||
| Unrealized loss on securities available-for-sale and tax benefits related to adoption of SFAS 158 and other comprehensive income | 2,293 | 2,327 | |||||
| Other | 518 | 316 | |||||
| Federal NOL | 5,258 | 1,480 | |||||
| NJ NOL and AMA credits | 1,479 | 871 | |||||
| Total gross deferred tax asset | $ | 12,542 | $ | 7,809 | |||
Deferred tax liabilities: | |||||||
| Depreciation | $ | 287 | $ | 412 | |||
| Market discount accretion | 510 | 581 | |||||
| Deferred fee expense-mortgages | 547 | 599 | |||||
| Purchase accounting | 292 | 504 | |||||
| Other | 67 | 120 | |||||
| Total gross deferred tax liabilities | 1,703 | 2,216 | |||||
| Net deferred tax asset | $ | 10,839 | $ | 5,593 | |||
FDIC Requirements | |||||||||||||||||||
Union Center National Bank Actual | Minimum Capital Adequacy | For Classification as Well Capitalized | |||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| December 31, 2006 Leverage (Tier 1) capital | $ | 82,113 | 8.12 | % | $ | 41,250 | 4.00 | % | $ | 50,697 | 5.00 | % | |||||||
Risk-Based Capital: | |||||||||||||||||||
| Tier 1 | 82,113 | 12.37 | % | 26,558 | 4.00 | % | 39,837 | 6.00 | % | ||||||||||
| Total | 87,073 | 13.11 | % | 53,116 | 8.00 | % | 66,396 | 10.00 | % | ||||||||||
| December 31, 2005 Leverage (Tier 1) capital | $ | 82,379 | 7.43 | % | $ | 45,221 | 4.00 | % | $ | 55,654 | 5.00 | % | |||||||
Risk-Based Capital: | |||||||||||||||||||
| Tier 1 | 82,379 | 12.82 | % | 25,698 | 4.00 | % | 38,547 | 6.00 | % | ||||||||||
| Total | 87,316 | 13.59 | % | 51,397 | 8.00 | % | 64,246 | 10.00 | % | ||||||||||
Parent Corporation Actual | Minimum Capital Adequacy | For Classification as Well Capitalized | |||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
| December 31, 2006 Leverage (Tier 1) capital | $ | 87,955 | 8.64 | % | $ | 41,524 | 4.00 | % | $ | 51,040 | 5.00 | % | |||||||
Risk-Based Capital: | |||||||||||||||||||
| Tier 1 | 87,955 | 13.14 | % | 26,699 | 4.00 | % | 40,048 | 6.00 | % | ||||||||||
| Total | 92,915 | 13.88 | % | 53,398 | 8.00 | % | N/A | N/A | |||||||||||
| December 31, 2005 Leverage (Tier 1) capital | $ | 102,159 | 9.07 | % | $ | 45,913 | 4.00 | % | $ | 56,519 | 5.00 | % | |||||||
Risk-Based Capital: | |||||||||||||||||||
| Tier 1 | 102,159 | 15.51 | % | 26,340 | 4.00 | % | 39,509 | 6.00 | % | ||||||||||
| Total | 107,096 | 16.26 | % | 52,679 | 8.00 | % | N/A | N/A | |||||||||||
December 31, | ||||||||||||
2006 | 2005 | |||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| (Dollars in Thousands) | ||||||||||||
| FINANCIAL ASSETS: | ||||||||||||
| Cash and cash equivalents | $ | 44,363 | $ | 44,363 | $ | 19,343 | $ | 19,343 | ||||
| Investments available-for-sale | 250,603 | 250,603 | 377,216 | 377,216 | ||||||||
| Investments held to maturity | 131,130 | 130,900 | 140,514 | 140,628 | ||||||||
| Net loans | 545,454 | 541,672 | 500,889 | 492,267 | ||||||||
| Accrued interest receivable | 4,932 | 4,932 | 5,875 | 5,875 | ||||||||
| FINANCIAL LIABILITIES: | ||||||||||||
| Non-interest-bearing deposits | 136,453 | 136,453 | 139,911 | 139,911 | ||||||||
| Interest-bearing deposits | 590,318 | 589,941 | 560,690 | 559,491 | ||||||||
| Federal funds purchased, securities sold under agreement to repurchase and FHLB advances | 206,434 | 207,549 | 293,963 | 295,035 | ||||||||
| Subordinated debentures | 5,155 | 5,040 | 15,465 | 15,465 | ||||||||
| Accrued interest payable | 1,817 | 1,817 | 1,437 | 1,437 | ||||||||
(Dollars in Thousands) | Amount | ||||
| Due in 0 to 3 Months | $ | 43,063 | |||
| Due in 4 to 6 Months | 31,538 | ||||
| Due in 7 to 12 Months | 6,257 | ||||
| Due in 2008 | 999 | ||||
| Due in 2009 | 1,450 | ||||
| Due in 2010 | 316 | ||||
| Total | $ | 83,623 | |||
CONDENSED STATEMENTS OF CONDITION | |||||||
At December 31, | |||||||
2006 | 2005 | ||||||
| (Dollars in Thousands) | |||||||
ASSETS | |||||||
| Cash and cash equivalents | $ | 529 | $ | 3,330 | |||
| Investment in subsidiary | 96,732 | 95,113 | |||||
| Securities available for sale | 4,698 | 15,236 | |||||
| Other assets | 1,320 | 2,095 | |||||
| Total assets | $ | 103,279 | $ | 115,774 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Other liabilities | $ | 511 | $ | 820 | |||
| Subordinated debentures | 5,155 | 15,465 | |||||
| Stockholders’ equity | 97,613 | 99,489 | |||||
| Total liabilities and stockholders’ equity | $ | 103,279 | $ | 115,774 | |||
CONDENSED STATEMENTS OF INCOME | ||||||||||
For Years Ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Income | ||||||||||
| Dividend income from subsidiary | $ | 4,770 | $ | 6,055 | $ | 3,238 | ||||
| Other income | 684 | 334 | 78 | |||||||
| Management fees | 266 | 315 | 227 | |||||||
| Total Income | 5,720 | 6,704 | 3,543 | |||||||
| Expenses | (1,866 | ) | (1,357 | ) | (1,087 | ) | ||||
| Income before equity in earnings of subsidiary | 3,854 | 5,347 | 2,456 | |||||||
| Undistributed equity in earnings of subsidiary | 44 | 2,299 | 5,166 | |||||||
| Net Income | $ | 3,898 | $ | 7,646 | $ | 7,622 | ||||
CONDENSED STATEMENTS OF CASH FLOWS | ||||||||||
For Years Ended December 31 | ||||||||||
2006 | 2005 | 2004 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Operating Activities: | ||||||||||
| Net income | $ | 3,898 | $ | 7,646 | $ | 7,622 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| (Gain)Loss on securities sold | (315 | ) | 0 | 0 | ||||||
| Undistributed equity in earnings of subsidiary | (44 | ) | (2,299 | ) | (5,166 | ) | ||||
| Decrease (increase) in other assets | 291 | (439 | ) | (117 | ) | |||||
| (Decrease) increase in other liabilities | (892 | ) | 459 | (282 | ) | |||||
| Stock based compensation | 160 | 0 | 0 | |||||||
| Amortization of premium and accretion of discount on investment securities, net | 39 | 0 | 0 | |||||||
| Net cash provided by operating activities | 3,137 | 5,367 | 2,057 | |||||||
| Investing Activities: | ||||||||||
| Purchases of available-for-sale securities | (13,300 | ) | (46,635 | ) | (11,094 | ) | ||||
| Maturity of available-for-sale securities | 24,838 | 42,585 | 0 | |||||||
| Cash consideration paid to acquire Red Oak Bank | 0 | (13,279 | ) | 0 | ||||||
| Investments in subsidiary | 0 | 0 | (4,000 | ) | ||||||
| Net cash provided by (used in) investing activities | 11,538 | (17,329 | ) | (15,094 | ) | |||||
| Financing Activities: | ||||||||||
| Cash dividends | (4,808 | ) | (4,518 | ) | (3,238 | ) | ||||
| Proceeds from exercise of stock options | 674 | 399 | 559 | |||||||
| Repurchase of treasury stock | (3,366 | ) | 0 | 0 | ||||||
| Proceeds from redemption/issuance of common stock | (16 | ) | 19,105 | 9,815 | ||||||
| Proceeds from redemption/issuance of subordinated debentures | (10,310) | 0 | 0 | |||||||
| Excess tax benefits from stock based compensation | 350 | 0 | 0 | |||||||
| Net cash (used in) provided by financing activities | (17,476 | ) | 14,986 | 7,136 | ||||||
| Increase (decrease) in cash and cash equivalents | (2,801 | ) | 3,024 | (5,901 | ) | |||||
| Cash and cash equivalents at beginning of year | 3,330 | 306 | 6,207 | |||||||
| Cash and cash equivalents at the end of year | $ | 529 | $ | 3,330 | $ | 306 | ||||
2006 | |||||||||||||
4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | ||||||||||
| (Dollars in Thousands, Except per Share Data) | |||||||||||||
| Total interest income | $ | 13,408 | $ | 13,632 | $ | 13,054 | $ | 13,231 | |||||
| Total interest expense | 7,717 | 7,680 | 6,746 | 6,831 | |||||||||
| Net interest income | 5,691 | 5,952 | 6,308 | 6,400 | |||||||||
| Provision for loan losses | 57 | 0 | 0 | 0 | |||||||||
| Total other income net of gains (losses) on securities sold | 817 | 795 | 796 | 790 | |||||||||
| Net gains (losses) on securities sold | 801 | 212 | 77 | (3,655 | )(1) | ||||||||
| Other expense | 6,656 | 5,735 | 5,766 | 6,201 | |||||||||
| Provision for income taxes (benefit) | (1,695 | ) | (78 | ) | 43 | (1,599 | ) | ||||||
| Income (loss) before income taxes (benefit) | 596 | 1,224 | 1,415 | (2,666 | ) | ||||||||
| Net income (loss) | 2,291 | 1,302 | 1,372 | (1,067 | ) | ||||||||
| Earnings per share: | |||||||||||||
| Basic | $ | 0.17 | $ | 0.10 | $ | 0.10 | $ | (0.08 | ) | ||||
| Diluted | $ | 0.17 | $ | 0.10 | $ | 0.10 | $ | (0.08 | ) | ||||
| Weighted average common shares outstanding: | |||||||||||||
| Basic | 13,236,360 | 13,234,443 | 13,276,568 | 13,435,226 | |||||||||
| Diluted | 13,314,543 | 13,323,107 | 13,353,176 | 13,435,226 | |||||||||
We have audited Center Bancorp, Inc. (Unaudited) – (continued)
2005 | |||||||||||||
4th Quarter | 3rd Quarter | 2nd Quarter | 1st Quarter | ||||||||||
| (Dollars in Thousands, Except per Share Data) | |||||||||||||
| Total interest income | $ | 13,636 | $ | 13,574 | $ | 12,337 | $ | 10,956 | |||||
| Total interest expense | 6,848 | 6,419 | 5,488 | 4,541 | |||||||||
| Net interest income | 6,788 | 7,155 | 6,849 | 6,415 | |||||||||
| Provision for loan losses | 0 | 0 | 0 | 0 | |||||||||
| Total other income net of gains (losses) on securities sold | 810 | 970 | 891 | 815 | |||||||||
| Net gains (losses) on securities sold | (12 | ) | 326 | 23 | 13 | ||||||||
| Other expense | 5,514 | 5,937 | 5,423 | 5,339 | |||||||||
| Income before income taxes | 2,072 | 2,514 | 2,340 | 1,904 | |||||||||
| Provision for income taxes | 140 | 478 | 407 | 159 | |||||||||
| Net income | 1,932 | 2,036 | 1,933 | 1,745 | |||||||||
| Earnings per share: | |||||||||||||
| Basic | $ | 0.14 | $ | 0.15 | $ | 0.18 | $ | 0.17 | |||||
| Diluted | $ | 0.14 | $ | 0.15 | $ | 0.18 | $ | 0.17 | |||||
| Weighted average common shares outstanding: | |||||||||||||
| Basic | 13,429,606 | 13,427,251 | 10,962,507 | 10,432,315 | |||||||||
| Diluted | 13,471,205 | 13,472,086 | 11,005,043 | 10,477,434 | |||||||||
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control andbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’scorporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’scorporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the companycorporation are being made only in accordance with authorizations of management and directors of the company;corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scorporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Center Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsstatements of condition of Center Bancorp, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statementsstatement of operations,income, changes in stockholders’ equity and cash flows for each of the years in the three yearthree-year period ended December 31, 2006.2009 and our report dated March 16, 2010 expressed an unqualified opinion.
/s/ ParenteBeard LLC
ParenteBeard LLC
Reading, Pennsylvania
March 16, 2010
(d) Changes in Internal Controls Over Financial Reporting
There werehave been no changes in the Corporation’sCompany’s internal control over financial reporting as such term is definedidentified in Rules 13a-15(f) and 15d-15(f) under the Exchange Act,Assessment that occurred during the last fiscal quarter of the period covered byto which this reportAnnual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect, the Corporation’sCompany’s internal control over financial reporting, subsequent to December 31, 2006.
None.
PART III
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 20072010 Annual Meeting of Stockholders. Certain information on Executive Officers of the registrant is included in Part I, Item 4A3A of this report, which is also incorporated herein by reference.
The Corporation maintains a code of ethics applicable to the Corporation’s chief executive officer, senior financial professional personnel (including the Corporation’s chief financial officer, principal accounting officer or controller and persons performing similar transactions), all other executive officers and all directors. The Corporation also maintains a code of conduct applicable to all other employees. Copies of both codes were filed as exhibits to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.2003. The corporationCorporation will provide copies of such codes to any person without charge, upon request to Anthony C. Weagley, Vice President and Treasurer,Chief Executive Officer, Center Bancorp, Inc., 2455 Morris Avenue, Union, NJ 07083.
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 20072010 Annual Meeting of Stockholders.
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 20072010 Annual Meeting of Stockholders.
Stock Compensation Plan Information
For information related to stock based compensation, see Note 16 of the Notes to Consolidated Financial Statements. The following table gives information about the Corporation’s common stock that may be issued upon the exercise of options, warrants and rights under the Corporation’s 2009 Equity Incentive Plan, 1999 Incentive Plan, 1993 Employee Stock Option Plan, 1993 Outside Director Stock Option Plan and 2003 Non-Employee Director Stock Option Plan as of December 31, 2009. These plans were the Corporation’s only equity compensation plans in existence as of December 31, 2009.
| | | | |||||||||
| Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||||||||
| Equity Compensation Plans Approved by Shareholders | 192,002 | $ | 7.67 – $15.73 | 1,079,622 | ||||||||
| Equity Compensation Plans Not Approved by Shareholders | — | — | — | |||||||||
| Total | 192,002 | $ | 7.67 – $15.73 | 1,079,622 | ||||||||
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 20072010 Annual Meeting of Stockholders.
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 20072010 Annual Meeting of Stockholders.
PART IV
| (a) | (1) Financial Statements and Schedules: |
The following Financial Statements and Supplementary Data are filed as part of this annual report:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm
| (b) | Exhibits (numbered in accordance with Item 601 of Regulation S-K) filed herewith incorporated by reference as part of this annual report. |
| | |
No. | ||
| 3.1 | The Registrant’s Certificate of | |
| 3.2 | By-Laws of the Registrant is incorporated by reference to | |
| 10.1 | Letter Agreement, dated January 9, 2010, including the Securities Purchase Agreement — Standard Terms attached thereto, between the Registrant and the United States Department of the Treasury is incorporated by reference to Exhibit 10.1 to the Registrant’s | |
| The Registrant’s 1993 Employee Stock Option Plan is incorporated by reference to | ||
| The Registrant’s 1993 Outside Director Stock Option Plan is incorporated by reference to | ||
| 10.5 | ||
| 10.6 | ||
| Amended and restated employment agreement among the Registrant, its bank subsidiary and Anthony C. Weagley, effective as of January 1, | ||
| Amended and restated employment agreement among the Registrant, its bank subsidiary and Lori A. Wunder, effective as of January 1, 2007 is incorporated by reference to | ||
| A change in control agreement among the Registrant, its bank subsidiary and | ||
| Directors’ Retirement Plan is incorporated by reference to |
| | |
| Exhibit No. | Description | |
| 10.10 | Center Bancorp, Inc. 1999 Stock Incentive Plan is incorporated by reference to |
| Registrant’s Placement Agreement dated December 12, 2003 with Sandler O’Neill & Partners, L.P. to issue and sell $5 million aggregate liquidation amount of floating rate MMCapS(SM) Securities is incorporated by reference to Exhibit 10.15 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003. | ||
| Indenture dated as of December 19, 2003, between the Registrant and Wilmington Trust Company relating to $5.0 million aggregate principal amount of floating rate debentures is incorporated by reference to Exhibit 10.16 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003. | ||
| Amended and restated Declaration of Trust of Center Bancorp Statutory Trust II, dated as of December 19, 2003 is incorporated by reference to Exhibit 10.17 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003. | ||
| Guarantee | ||
| 10.16 | ||
| 10.17 | Form of Executive Waiver Agreement, executed by each of Lori A. Wunder, A. Richard Abrahamian, Ronald M. Shapiro, William J. Boylan and Anthony C. Weagley is incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated January 13, 2009 | |
| 10.18 | Registration Rights Agreement, dated September 29, 2004, relating to securities issued in a September 2004 private placement of securities, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated October 1, 2004. | |
| 10.19 | The Registrant’s Amended and Restated 2003 Non-Employee Director Stock Option Plan, as amended and restated, is incorporated by reference to Exhibit | |
| 10.20 | Amended and restated employment | |
| 10.21 | Amended and restated | |
| 10.22 | ||
| Registration Rights Agreement, dated June 30, 2005, relating to securities issued in a June 2005 private placement of securities, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated June 30, 2005. | ||
| Open Market Share Purchase Incentive Plan is incorporated by reference to exhibit 10.1 to registrant’s | ||
| Deferred Compensation | ||
| 10.25 | Amendment to Employment Agreement among the Registrant, its bank subsidiary and Julie D’Aloia, dated December 3, 2007, is incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 20, 2007. |
| | |
| Exhibit No. | Description | |
| 10.26 | Amendment to Employment Agreement among the Registrant, its bank subsidiary and Mark Cardone, dated December 3, 2007, is incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated December 20, 2007. | |
| 10.27 | Amendment to Employment Agreement among the Registrant, its bank subsidiary and Lori A. Wunder, dated December 3, 2007, is incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated December 20, 2007. | |
| 10.28 | Change in Control Agreement among the Registrant, its bank subsidiary and Ronald M. Shapiro is incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008. | |
| 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. | |
| 12.1 | Statement of Ratios of Earnings to Fixed Charges. | |
| 14.1 | Code of Ethics is incorporated by reference to Exhibit 14.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003. | |
| 21.1 | Subsidiaries of the Registrant. |
| 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| 31.1 | Personal certification of the chief executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Personal certification of the acting chief financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Personal certification of the chief executive officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Personal certification of the acting chief financial officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | |
| 99.1 | Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act of 2008. | |
| 99.3 | Code of |
| (c) | Financial Statement Schedules |
All financial statement schedules are omitted because they are either inapplicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.
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. | ||
| March 16, 2010 | ||
By: | /s/ | |
| Anthony C. Weagley Anthony C. Weagley President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant, in the capacities described below on March 15, 2007,16, 2010, have signed this report below.
| | ||
| /s/ | |||
| Alexander A. Bol* Alexander A. Bol | |||
| /s/ Brenda Curtis* Brenda Curtis | Director | ||
| /s/ John J. DeLaney, Jr.* John J. DeLaney, Jr. | Director | ||
| /s/ James J. Kennedy | Director | ||
| /s/ | |||
Howard Kent | |||
| /s/ Elliot I. Kramer* Elliot I. Kramer | Director | ||
| /s/ Nicolas Minoia* Nicholas Minoia | Director | ||
| /s/ Harold Schechter* Harold Schechter | Director | ||
| /s/ Lawrence B. Seidman* Lawrence B. Seidman | Director | ||
| /s/ William A. Thompson* William A. Thompson | Director | ||
| /s/ Raymond Vanaria* Raymond Vanaria | Director | ||
| /s/ Anthony C. Weagley Anthony C. Weagley | President and Chief Executive Officer and |
| | ||
*By: /s/ Anthony C. Weagley | |||
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