FINANCIAL HIGHTLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
PERCENT
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 2000 1999 CHANGE
- -------------------------------------------------------------------------------------------------------------
EARNINGS
Net Interest Income $ 19,472 $ 19,291 0.94%
Provision for Loan Losses 363 108 236.11
Other Income 1,711 1,091 56.83
Loss on Securities Sold (78) (2) 3800.00
Other Expenses 13,347 13,290 0.43
Net Income 5,005 4,629 8.12
Cash Dividends Declared $ 2,265 $ 2,213 2.35
- -------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Income
Basic $ 1.33 $ 1.23 8.13%
Diluted 1.32 1.22 8.20
Cash Dividends Paid 0.60 0.58 3.45
Book Value 10.52 9.62 9.36
Tangible Book Value $ 9.87 $ 8.90 10.90
- -------------------------------------------------------------------------------------------------------------
AT YEAR END:
Market Value Bid Ask Bid Ask
Per common share $21.00 $21.25 $15.00 $15.63
- -------------------------------------------------------------------------------------------------------------
AT YEAR END:
Investment Securities $ 330,267 $ 303,940 8.66%
Loans 198,949 169,089 17.66
Assets 569,553 509,624 11.76
Deposits 425,296 389,255 9.26
FHLB advances 50,000 50,000 --
Federal funds purchased and securities sold
under agreements to repurchase 51,262 30,752 66.69
Stockholders' Equity $ 39,182 $ 36,513 7.31
Shares Outstanding 3,725,529 3,794,477 (1.82)
- -------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average assets 0.94% 0.92%
- -------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 13.43% 12.44%
Return on tangible average stockholders' equity 14.43% 13.50%
- -------------------------------------------------------------------------------------------------------------
Cash dividend declared as a
percent of Net Income 45.25% 47.81%
- -------------------------------------------------------------------------------------------------------------
Average stockholders' equity as a percent of average
total assets 6.97% 7.43%
Tangible Average stockholders' equity as a
percent of average total assets 6.52% 6.92%
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity as a percent of total assets 6.88% 7.16%
Tangible Stockholders' equity as a percent of total assets 6.48% 6.66%
- -------------------------------------------------------------------------------------------------------------
Average Risk Based Tier I Capital Ratio 13.24% 15.44%
Average Risk Based Tier I and Tier II Capital 13.79% 16.06%
Tier I Leverage Ratio 6.60% 6.93%
- -------------------------------------------------------------------------------------------------------------
[CENTER BANCORP, INC. LOGO]
SUMMARY OF SELECTED STATISTICAL INFORMATION
AND FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
SUMMARY OF INCOME
Interest income $ 35,655 $ 32,092 $ 30,686 $ 30,706 $ 26,430
Interest expense 16,183 12,801 13,573 14,487 11,586
Net interest income 19,472 19,291 17,113 16,219 14,844
Provision (credit) for loan losses 363 108 120 -- (132)
Net interest income after provision
(credit) for loan losses 19,109 19,183 16,993 16,219 14,976
Other income 1,633 1,089 971 1,111 727
Other expense 13,347 13,290 11,651 10,596 9,910
Income before income tax expense 7,395 6,982 6,313 6,734 5,793
Income tax expense 2,390 2,353 2,141 2,223 1,636
Net income $ 5,005 $ 4,629 $ 4,172 $ 4,511 $ 4,157
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA
Investments $ 330,267 $ 303,940 $ 287,966 $ 298,298 $ 280,123
Total loans 198,949 169,089 150,099 132,424 117,830
Total assets 569,553 509,624 470,134 473,112 459,218
Deposits 425,296 389,255 377,167 436,010 426,654
Stockholders' equity $ 39,182 $ 36,513 $ 36,631 $ 33,422 $ 30,213
- ----------------------------------------------------------------------------------------------------------------------
DIVIDENDS
Cash dividends $ 2,265 $ 2,213 $ 2,023 $ 1,863 $ 1,787
Dividend payout ratio 45.3% 47.8% 48.5% 41.3% 43.0%
- ----------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE
Cash dividends $ 0.60 $ 0.58 $ 0.52 $ 0.50 $ 0.48
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $ 1.33 $ 1.23 $ 1.12 $ 1.22 $ 1.13
Diluted $ 1.32 $ 1.22 $ 1.10 $ 1.21 $ 1.13
- ----------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 3,774,482 3,775,846 3,741,478 3,710,804 3,689,444
Diluted 3,794,323 3,799,680 3,777,390 3,738,236 3,698,708
- ----------------------------------------------------------------------------------------------------------------------
OPERATING RATIOS
Return on average assets 0.94% 0.92% 0.88% 0.94% 1.00%
Return on tangible average equity 14.43% 13.50% 12.93% 15.92% 15.21%
- ----------------------------------------------------------------------------------------------------------------------
BOOK VALUE
Book value per common share $ 10.52 $ 9.62 $ 9.75 $ 8.99 $ 8.17
Tangible book value per common share $ 9.87 $ 8.90 $ 8.94 $ 8.08 $ 7.17
- ----------------------------------------------------------------------------------------------------------------------
NON-FINANCIAL INFORMATION
Common stockholders 581 603 606 609 633
Staff--Full time equivalent 156 162 153 140 151
- ----------------------------------------------------------------------------------------------------------------------
Footnote: All per share amounts have been adjusted retroactively for stock
splits and stock dividends during the periods presented.
15
[CENTER BANCORP, INC. LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
The following introduction to Management's Discussion and Analysis
highlights the principal factors that contributed to Center Bancorp's earnings
performance in 2000.
Center Bancorp's performance for 2000 was highlighted by loan growth,
in the commercial, mortgage and consumer loan portfolios, with consistent asset
quality. Commensurate with the growth in the loan portfolio, the Corporation
recorded a $363,000 provision for loan losses during 2000.
Net income for the year ended December 31, 2000, amounted to $5,005,000
as compared to $4,629,000 and $4,172,000 earned in 1999 and 1998, respectively.
Basic earnings per share for 2000 amounted to $1.33 as compared to $1.23 and
$1.12 earned in 1999 and 1998, respectively. Diluted earnings per share were
$1.32 for 2000 compared to $1.22 in 1999 and $1.10 in 1998.These figures have
been restated to reflect the 5% Stock Dividend distributed June 1, 1999, and the
three-for-two stock split distributed in 1998.
Earnings performance for 2000 reflected increased net interest income
and non-interest income and a reduction in the effective tax rate, offset in
part by an increase in operating expenses. These expenses were a direct result
of the growth and expansion of Union Center National Bank (the "Bank"). Net
interest income increased primarily as a result of a change in the asset mix,
and increases in loans, despite a compression of the net interest margin driven
by higher interest rates and resulting in higher rates paid on deposits and
borrowings.
The Corporation's total assets at December 31, 2000 amounted to $569.6
million, increasing $59.9 million or 11.8 percent from December 1999 levels. The
return on average assets was 0.94 percent in 2000, as compared with 0.92 percent
and 0.88 percent in 1999 and 1998 respectively.
A continuing key element of the Corporation's consistent performance is
its strong capital base. The Corporation's risk-based capital ratios at December
31, 2000 were 12.9 percent for Tier I capital and 13.5 percent for total
risk-based capital. These ratios substantially exceed the minimum of 4 percent
for Tier I capital and 8 percent for total capital under regulatory guidelines.
From a performance viewpoint, return on tangible average shareholders' equity
was 14.4 percent in 2000, compared with 13.5 percent for 1999 and 12.9 percent
in 1998.
Non-historical statements set forth in this Annual Report may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements include expressions
about management's confidence and strategies and management's expectations about
new and existing programs and products, relationships, opportunities, technology
and market conditions. These statements may use such forward-looking terminology
as "expect", "look", "believe', "plan", "anticipate", "may", "will" or similar
statements or variations of such terms or otherwise express views concerning
trends and the future. Such forward-looking statements involve certain risks and
uncertainties. These include, but are not limited to, the direction of interest
rates, continued levels of loan quality and origination volume, continued
relationships with major customers including sources for loans, as well as the
effects of economic conditions and legal and regulatory barriers and structure,
including those relating to the deregulation of the financial services industry.
Actual results may differ materially from such forward-looking statements.
Center Bancorp, Inc. assumes no obligation for updating any such forward-looking
statements at any time.
The following sections discuss the Corporation's Results of Operations,
Asset and Liability Management, Liquidity and Capital Resources.
16
RESULTS OF OPERATIONS
The most significant component of Center Bancorp's earnings is net
interest income, which is the difference between the interest earned on the
portfolio of earning assets (principally investments and loans) and the interest
paid for deposits and short-term borrowings which support these assets.
Net interest income is directly affected by changes in the volume and
mix of interest-earning assets and interest-bearing liabilities which support
those assets, as well as changes in the rates earned and paid. Net interest
income is presented in this financial review on a fully tax-equivalent basis,
whereby tax-exempt income (primarily interest earned on various obligations of
state and political subdivisions) is adjusted by the amount of income tax which
would have been paid had the assets been invested in taxable issues.
Consequently, the net interest income data presented in this financial review
differ from the Corporation's net interest income components of the consolidated
financial statements presented elsewhere in this report.
The following table presents the components of net interest income (on
a tax-equivalent basis) for the past three years.
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
FROM FROM FROM
PRIOR PERCENT PRIOR PERCENT PRIOR PERCENT
(DOLLARS IN THOUSANDS) AMOUNT YEAR CHANGE AMOUNT YEAR CHANGE AMOUNT YEAR CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Investments $20,872 $ 1,430 7.4 $19,442 $ 230 1.2 $19,212 $ (966) (4.8)
Loans, including fees 14,407 2,209 18.1 12,198 1,274 11.7 10,924 944 9.5
Federal funds sold and securities
purchased under agreement
to resell 376 (76) (16.8) 452 (98) (17.8) 550 2 0.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 35,655 3,563 11.1 32,092 1,406 4.6 30,686 (20) (0.1)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Certificates $100,000 or more 3,482 779 28.8 2,703 (1,598) (37.2) 4,301 (1,535) (26.3)
Deposits 8,762 1,452 19.9 7,310 (540) (6.9) 7,850 (184) (2.3)
Borrowings 3,939 1,151 41.3 2,788 1,366 96.1 1,422 805 130.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 16,183 3,382 26.4 12,801 (772) (5.7) 13,573 (914) (6.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income * 19,472 181 0.9 19,291 2,178 12.7 17,113 894 5.5
Tax-equivalent adjustment 409 (32) (7.3) 441 80 22.2 361 (120) (25.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis $19,881 $ 149 0.8 $19,732 $ 2,258 12.9 $17,474 $ 774 4.6
====================================================================================================================================
* Before the provision for loan losses
NOTE: The tax-equivalent adjustment was computed based on an assumed statutory
Federal income tax rate of 34 percent. Adjustments were made for interest earned
on securities of state and political subdivisions.
17
[CENTER BANCORP, INC. LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income on a fully tax-equivalent basis increased $149,000
or .8 percent to $19.9 million during 2000 from $19.7 million for 1999. The net
interest margin decreased from 4.20 percent in 1999 to 3.98 percent for 2000.
The change in net interest income was due primarily to an increased volume of
interest-earning assets offset in large part by a higher cost of funds,
reflecting the increase in short-term interest rates that prevailed throughout
most of 2000. Average interest-earning assets for 2000 amounted to $499.4
million compared to $469.7 million for 1999. Average interest-bearing
liabilities increased $28.8 million during 2000 to $404.6 million from $375.8
million in 1999. Net average interest-earning assets increased from $93.3
million in 1999 to $94.8 in 2000. The 2000 change in average balances was
primarily due to increased volumes of interest-bearing assets, primarily loans.
The average yield on interest-earning assets increased from 6.93
percent in 1999 to 7.22 percent in 2000 while there was a greater increase in
the average cost of interest-bearing liabilities (3.41 percent in 1999 versus
4.00 percent in 2000), reflecting an increase in short-term interest rates that
prevailed through most of 2000.
The factors underlying the year-to-year changes in net interest income
are reflected in the tables appearing on page 17 and on pages 19 and 33, each of
which have been presented on a tax-equivalent basis (assuming a 34 percent tax
rate). The table on page 33 (Average Statements of Condition with Interest and
Average Rates) shows the Corporation's consolidated average balance of assets,
liabilities and stockholders' equity, the amount of income produced from
interest-earning assets and the amount of expense resulting from
interest-bearing liabilities, and net interest income as a percentage of average
interest-earning assets. The table presented on page 19 (Analysis of Variance in
Net Interest Income Due to Volume and Rates) quantifies the impact on net
interest income resulting from changes in average balances and average rates
over the past three years. Any change in interest income or expense attributable
to both changes in volume and changes in rate has been allocated in proportion
to the relationship of the absolute dollar amount of change in each category.
18
ANALYSIS OF VARIANCE IN NET INTEREST
INCOME DUE TO VOLUME AND RATES
2000/1999 1999/1998
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
INVESTMENT SECURITIES:
Taxable $ 593 $ 901 $ 1,494 $ 18 $ 55 $ 73
Non-Taxable (134) 38 (96) 282 (45) 237
Federal funds sold and securities
purchased under agreement to resell (169) 93 (76) (62) (36) (98)
Loans, net of unearned discounts 1,984 225 2,209 1,626 (352) 1,274
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,274 1,257 3,531 1,864 (378) 1,486
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposits 194 149 343 298 74 372
Savings deposits 365 884 1,249 (20) (197) (217)
Time deposits (290) 863 573 (1,463) (803) (2,266)
Other interest-bearing deposits (13) 79 66 56 (83) (27)
Borrowings 646 505 1,151 1,426 (60) 1,366
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 902 2,480 3,382 297 (1,069) (772)
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET
INTEREST INCOME $ 1,372 $(1,223) $ 149 $ 1,567 $ 691 $ 2,258
===================================================================================================================================
Interest income (tax-equivalent) increased by $3,531,000 from 1999 to
2000 and increased by $1,486,000 from 1998 to 1999. The primary factor in the
increase in interest income during 2000 was the increase in the volume of
interest-earning assets coupled with higher average rates earned on
interest-earning assets. The Corporation's loan portfolio increased on average
by $29.2 million, primarily as a result of increased volumes of commercial real
estate, commercial and home equity loans. This increase was primarily achieved
through increased business development and access to new markets through the
expanded branch network. The loan portfolio (traditionally the highest yielding
type of interest-earning asset) represented 37.2 percent of the Corporation's
interest-earning assets (on average) during 2000 as compared with 34.1 percent
of such assets (on average) during 1999. The increased level of interest income
generated from the loan portfolio in 2000 was due to increased volume, coupled
with a 14 basis point increase in average yield on the Corporation's loans.
Investments represented a modest change in the earning-asset mix in
2000. The investment portfolio increased on average by $6.9 million.
Within the investment portfolio, the average volume in 2000 increased
in taxable securities by $8.8 million, while the non-taxable portfolio decreased
by $1.9 million compared to 1999. The average yield on the investment portfolio
was 6.92 and 6.61 percent in 2000 and 1999, respectively.
Interest income (tax-equivalent) increased by $1.486 million form 1998
to 1999 primarily due to an increase in interest-earning assets offset in part
by lower average rates on interest-earning assets.
Interest expense increased during 2000, primarily as a result of an
increase in average rates paid on the increased average volumes of deposits and
short-term borrowings. For the year ended December 31, 2000, interest expense
increased by $3.4 million or 5.7 percent as compared with the year ended
December 31, 1999. Interest expense for the twelve months ended December 31,
2000 was adversely affected by the introduction of a premium rate investment
savings account (Super Max) by the Corporation in April of 2000, which carried
an above market initial teaser rate.
19
[CENTER BANCORP, INC. LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
The average cost of funds increased by 59 basis points, reflecting the
increase in interest rates, and changes in the liability mix, (i.e., increased
volumes of more costly interest-bearing deposits offset by increased volumes of
short-term borrowings).
During 1999, interest expense decreased $772,000, or 5.7 percent as
compared with 1998. This was primarily a result of a reduction in average rates
paid, and an increase in lower costing short-term borrowings coupled with lower
rates that prevailed overall. The resulting average cost of funds to the
Corporation decreased by 34 basis points.
For the three-year period ended December 31, 2000, the Corporation's
net interest margin on a tax-equivalent basis (i.e., net interest income on a
tax-equivalent basis as a percent of average interest-earning assets) amounted
to 3.98 percent in 2000, 4.20 percent in 1999, and 3.92 percent in 1998. The
decrease in 2000 reflected a compression of margin due to a narrowing of spreads
between yields on loans and investments and rates paid for supporting funds,
while the increases noted for 1999 reflected a widening of spreads between
yields earned on loans and investments and rates paid for supporting funds.
There was a favorable change in the mix of interest-earning assets, primarily
the increased loan volumes. This was offset in part, however, by the effects of
the change in the mix of interest-bearing liabilities. During 2000 interest
rates increased, as a result of the Federal Reserve raising interest rates three
times in 2000 to curb inflationary pressures on the economy. This in turn
brought about higher rates that contributed significantly to the overall
increase in the cost of funds. Conversely, in 1999 the Federal Reserve lowered
rates two times, which provided for less costly deposits to fund earning-assets.
The rates paid on interest-bearing liabilities averaged 4.00 percent in 2000
compared to 3.41 percent in 1999 and 3.75 percent for 1998.
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) increased approximately 9 basis points during 2000
from 63 basis points in 1999. During the comparable periods of 1999 and 1998,
there was an increase of 6 basis points, from 57 points to 63 basis points.
The Corporation's net interest rate spread (i.e., the average yield on
average interest-earning assets, calculated on a tax-equivalent basis, minus the
average rate paid on interest-bearing liabilities) declined to 3.22 percent in
2000 from 3.52 percent in 1999 and was flat with the 3.22 percent spread in
1998. The decrease in net interest spread during 2000 was primarily a result of
the increased cost of interest-bearing liabilities, offset in part by an
increase in rates earned on interest-earning assets.
INVESTMENTS
The average volume of investment securities increased by $6.9 million
in 2000 as compared to 1999. The tax-equivalent yield on investments increased
to 6.92 percent in 2000 from 6.61 percent in 1999. The stability in the yield on
the investment portfolio in 2000 was achieved through equal or higher market
rates on purchases made to replace similar yielding investments, which had
either matured, were prepaid or were called.
The impact of repricing activity on yields was lessened by a change in
the mix of the portfolio and lengthening of investment maturities, resulting in
stable spreads. Securities available-for-sale are a part of the Corporation's
interest rate risk management strategy and may be sold in response to changes in
interest rates, changes in prepayment risk, liquidity management and other
factors.
At December 31, 2000, the total investment portfolio excluding
overnight investments, was $330.3 million, or 62.4 percent of earning-assets, as
compared to $303.9 million or 64.3 percent at December 31, 1999. The principal
components of the investment portfolio are U.S. Government Treasury and Federal
Agency securities. For additional information regarding the Corporation's
investment portfolio, see Note 4 to the Consolidated Financial Statements.
20
LOANS
Loan growth during 2000 occurred in all principal categories of the
loan portfolio. This growth resulted from the Corporation's aggressive marketing
and business development programs coupled with new opportunities brought about
from expansion of the Corporation's branch network into new key markets. The
increased yield on the loan portfolio was the result of a higher prime rate
environment during 2000, offset in part, with a continued competitive rate
structure, to attract new loans in light of growing market competition. The
effects on additions to the loan portfolio were lessened by continued
re-financing activity and by the heightened competition for borrowers that
exists in the Corporation's lending markets. The Corporation's desire to
continue growing this component of the earning-asset mix is reflected in its
current business development plan and marketing plans, as well as its corporate
strategic plan.
Analyzing the portfolio for the year ended December 31, 2000, average
loan volume increased $25.6 million, while the average yield increased 14 basis
points, as compared with 1999. Total average loan volume increased to $185.8
million with an average yield of 7.75 percent, as compared to $160.2 million
with an average yield of 7.61 percent for the year ended December 31, 1999. For
additional information regarding loans, see Note 5 to the Consolidated Financial
Statements.
ALLOWANCE FOR LOAN LOSSES
AND RELATED PROVISION
The purpose of the allowance for loan losses is to absorb the impact of
losses inherent in the loan portfolio. Additions to the allowance are made
through provisions charged against current operations and through recoveries
made on loans previously charged-off. The allowance for loan losses is
maintained at an amount considered adequate by management to provide for
potential credit losses based upon a periodic evaluation of the risk
characteristics of the loan portfolio. In establishing an appropriate allowance,
an assessment of the individual borrowers, a determination of the value of the
underlying collateral, a review of historical loss experience and an analysis of
the levels and trends of loan categories, delinquencies and problem loans are
considered. Such factors as the level and trend of interest rates and current
economic conditions are also reviewed. At year-end 2000, the level of the
allowance was $1,655,000 as compared to a level of $1,423,000 at December 31,
1999. The Corporation had a provision to the allowance for loan losses of
$363,000 in 2000, $108,000 in 1999 and $120,000 in 1998. The increase in the
provision for loan losses during 2000 was commensurate with the increase in the
loan volume recorded during the year, as well as, the increased level of
charge-offs during the year.
At December 31, 2000, the allowance for loan losses amounted to 0.83
percent of total loans. In management's view, the level of the allowance at
December 31, 2000 is adequate to cover losses inherent in the loan portfolio.
Management's judgement 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.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses. Such
agencies may require the Corporation to increase the allowance based on their
analysis of information available to them at the time of their examination. The
allowance for loan losses as a percentage of total loans amounted to 0.83
percent, 0.84 percent and 0.88 percent at December 31, 2000, 1999 and 1998,
respectively.
During 2000, the Corporation did not experience any substantial
problems within its loan portfolio. Net charge-offs were $131,000 in 2000,
$11,000 in 1999 and $63,000 in 1998. During 2000, the Corporation experienced a
higher level of charge-offs in the installment loan portfolio. The higher
charge-off level was attributed to the economic slow-down and the resulting
higher level of personal bankruptcies.
21
[CENTER BANCORP, INC. LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
The Corporation reacted to these events by tightening credit and
underwriting standards and by strengthening risk management. The Corporation had
non-accrual loans amounting to $246,000 at December 31, 2000, $292,000 at
December 31, 1999 and $41,000 at December 31, 1998. The decrease in non-accrual
loans for 2000 was attributable to a home equity loan, which was transferred to
other real estate owned (OREO). The Corporation continues to pursue aggressively
collections of principal and interest on loans previously charged-off.
The value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or at the fair value
of the collateral if the loan is collateral dependent. Impaired loans consist of
non-accrual loans and loans internally classified as substandard or below, in
each instance above an established dollar threshold of $200,000. All loans below
the established dollar threshold are considered homogenous and are collectively
evaluated for impairment. At December 31, 2000, total impaired loans amounted to
$1,461,000 compared with $519,000 at December 31, 1999; the Corporation did not
have any impaired loans at December 31, 1998. Although classified as
substandard, the impaired loans were current with respect to principal and
interest payments.
FIVE YEAR STATISTICAL
ALLOWANCE FOR LOAN LOSSES
The following table reflects the relationship of loan volume, the
provision and allowance for loan losses and net charge-offs for the past five
years.
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Average loans outstanding $ 185,846 $ 160,208 $ 138,967 $ 125,476 $ 107,897
- -----------------------------------------------------------------------------------------------------------------------
Total loans at end of period $ 198,949 $ 169,089 $ 150,099 $ 132,424 $ 117,830
- -----------------------------------------------------------------------------------------------------------------------
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Balance at the beginning of year $ 1,423 $ 1,326 $ 1,269 $ 1,293 $ 1,073
Charge-offs:
Commercial -- -- -- 2 --
Real estate mortgage -- -- -- -- 470
Installment loans 135 23 70 29 9
- -----------------------------------------------------------------------------------------------------------------------
Total charge-offs 135 23 70 31 479
- -----------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial -- -- -- -- --
Real estate mortgage -- -- -- -- 132
Installment loans 4 12 7 7 6
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 4 12 7 7 138
- -----------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS: 131 11 63 24 341
=======================================================================================================================
Adjustments from acquisition of Lehigh -- -- -- -- 693
=======================================================================================================================
Provision (credit) for loan losses 363 108 120 -- (132)
=======================================================================================================================
Balance at end of year $ 1,655 $ 1,423 $ 1,326 $ 1,269 $ 1,293
=======================================================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.07% 0.01% 0.05% 0.02% 0.32%
=======================================================================================================================
Allowance for Loan Losses as a percentage
of total loans at end of year 0.83% 0.84% 0.88% 0.96% 1.10%
=======================================================================================================================
22
The 2000 charge-off of $135,000 in installment loans was attributed to
the economic slow-down and a resulting higher level of personal bankruptcies.
The Corporation reacted to these events by tightening credit and underwriting
standards and by strengthening Risk Management. The 1996 charge-off of $470,000
in real-estate mortgage loans occurred on loans acquired from Lehigh, which were
subsequently sold. Similarly, the $132,000 loan loss recovery, in 1996, was on a
loan that had been previously part of Lehigh's portfolio.
ASSET QUALITY
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
analysis of credit requests and ongoing examination of outstanding loans and
delinquencies, with particular attention to portfolio dynamics and mix. The
Corporation strives to identify loans experiencing difficulty early enough to
correct the problems, to record charge-offs promptly based on realistic
assessments of current collateral values, and to maintain an adequate allowance
for loan losses at all times. These practices have protected the Corporation
during economic downturns and periods of uncertainty.
It is generally the Corporation's policy to discontinue interest
accruals once a loan is past due as to interest or principal payments for a
period of ninety days. When a loan is placed on non-accrual, interest accruals
cease and uncollected accrued interest is reversed and charged against current
income. Payments received on non-accrual loans are applied against principal. A
loan may only be restored to an accruing basis when it again becomes well
secured and in the process of collection or all past due amounts have been
collected. Loan origination fees and certain direct loan origination costs are
deferred and recognized over the life of the loan as an adjustment to the loan's
yield. Accruing loans past due 90 days or more are generally well secured and in
the process of collection.
The following table sets forth, as of the dates indicated, the amount
of the Corporation's non-accrual loans, restructured loans, accruing loans past
due 90 days or more and other real estate owned.
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Non-accrual loans $ 246 $ 292 $ 41 $ 27 $ 298
Accruing loans past due 90 days or more 2 -- 24 73 121
Other real estate owned 49 73 73 -- --
- ----------------------------------------------------------------------------------------------------
Total non-performing assets $ 297 $ 365 $ 138 $ 100 $ 419
====================================================================================================
Non-accrual loans at December 31, 2000 decreased $46,000 from the
amount reported at December 31, 1999. The decrease in non-accrual loans was
attributable to a decrease in a non-accrual home equity loan.
Non-accrual loans at December 31, 2000 consisted of two residential
mortgages and one home equity loan. At December 31, 2000, total impaired loans
amounted to $1,460,000 compared with $519,000 at December 31, 1999; the
Corporation did not have any impaired loans at December 31, 1998. Although
classified as substandard, the impaired loans were current with respect to
principal and interest payments.
At December 31, 2000 other than the loans set forth above, the
Corporation is not aware of any loans which present serious doubts as to the
ability of its borrowers to comply with present loan repayment terms and which
are expected to fall into one of the categories set forth in the table above.
Other real estate owned (OREO) at December 31, 2000 consisted of a two family
residential property with a carrying value of $49,000, while at December 31,
1999 and 1998, OREO consisted of a closed branch facility with a carrying value
of approximately $73,000.
23
[CENTER BANCORP, INC. LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
NON-INTEREST INCOME
The following table presents the principal categories of non-interest
income for each of the years in the three-year period ended December 31, 2000.
AT DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 % CHANGE 1999 1998 % CHANGE
- -----------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees $ 1,301 $ 863 50.75 $ 863 $ 748 15.37
Other income 410 228 79.82 228 223 2.24
Loss on securities sold (78) (2) 3800.00 (2) -- 100.00
- -----------------------------------------------------------------------------------------------------
Total other non-interest income $ 1,633 $ 1,089 49.95 $ 1,089 $ 971 12.15
=====================================================================================================
Total other (non-interest) incomes, exclusive of (losses)/gains on
securities sold, reflects an increase of $626,000 or 57.4 percent in 2000. This
increase was primarily a result of increased fee revenue reflected in service
charges, commissions and fees. The increase of $438,000 or 50.8 percent in
service charges, commissions and fees was driven, in part by increased fees from
ATM and Debit card activity. This amounted to $417,000 for the twelve months
ended December 31, 2000 as compared with $267,000 for the 1999 period. Included
in service charges, commission and fees was non-recurring income of $75,000
related to the Corporation's checkbook program. Other income increased $182,000
or 79.8 percent. This increase was primarily a result of increased letter of
credit fee revenue and non-recurring income of $102,000 resulting from a gain
the on sale of an OREO property. For the 1999 period, total other (non-interest)
income, exclusive of losses on securities sold, reflects an increase of $120,000
or 12.4 percent. The primary components of the increase were increased ATM fees
and increased fee income derived from checking account activity.
During 2000, the Corporation sold approximately $26.4 million in
securities from its available-for-sale portfolio with a net loss of
approximately $78,000. During 1999, the Corporation sold approximately $3.0
million in securities from its available-for-sale portfolio with a net loss of
$2,400.
NON-INTEREST EXPENSE
The following table presents the principal categories of non-interest
expense for each of the years in the three-year period ended December 31, 2000.
AT DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 % CHANGE 1999 1998 % CHANGE
- ---------------------------------------------------------------------------------------------------
OTHER NON-INTEREST EXPENSE:
Salaries and employee benefits $ 6,800 $ 6,772 0.4 $ 6,772 $ 6,005 12.8
Occupancy, net 1,340 1,251 7.2 1,251 1,063 17.7
Premises and equipment 1,453 1,348 7.8 1,348 1,297 3.9
Stationery and printing 432 471 (8.3) 471 438 7.5
Marketing and advertising 490 504 (2.8) 504 446 13.0
Other 2,832 2,944 (3.8) 2,944 2,402 22.6
- ---------------------------------------------------------------------------------------------------
Total other non-interest expense $ 13,347 $ 13,290 0.4 $ 13,290 $ 11,651 14.1
===================================================================================================
Total other non-interest expense increased $57,000 or .4 percent in
2000 as compared to an increase of $1,639,000 or 14.1 percent from 1998 to 1999.
The level of operating expenses during 2000 was favorably impacted by
management's commitment to control increases in non-interest expenses. While
management continues to emphasize expense control, the year to year increases in
expense are attributable to the continued expansion of the Bank's facilities,
continued investments in technology and the need to attract, develop and
24
retain high-caliber employees. Salaries and employee benefits accounted for 50.9
percent of total other non-interest expense for 2000, as compared to 50.9
percent and 51.5 percent for the years 1999 and 1998, respectively. The
Corporation's efficiency ratio (other expenses less non-recurring expenses as a
percentage of net interest income on a tax-equivalent basis and other income
exclusive of net securities gains/(losses)) was 60.2 percent, 61.8 percent and
56.8 percent respectively, for 2000, 1999 and 1998. The ratio of other expenses
to average assets was 2.60 percent in 2000 compared to 2.46 percent in 1999 and
2.21 percent in 1998. The level of operating expenses during 1999 reflected an
increase in all expense categories listed in the table above.
Salaries and employee benefits increased only $28,000 or .41 percent in
2000, primarily as a result of lower staffing levels attributable to the tight
labor market that prevailed throughout the year, preventing the Corporation from
achieving full staffing. The Corporation's staffing levels decreased to 156 full
time equivalent employees in 2000 as compared with 162 in 1999. The reduced
salary and benefit expense was offset in part by increased expense arising from
merit and promotional raises and higher benefits costs. The Corporation seeks to
achieve full staffing in 2001 to ensure that staffing is sufficient to meet the
Corporation's strategic initiatives and to support quality service to the
customers.
Employees' longevity has continued to play an important part. As of
December 31, 2000, the Corporation's employees, excluding officers, have been
employed by the Corporation for an average of 211 weeks or 4.1 years. This
factor contributes to the Corporation's continued productivity, as evidenced by
the ratio of average assets per full time-equivalent employee, which amounted to
$3.4 million, $3.1 million and $3.1 million in 2000, 1999 and 1998,
respectively.
Occupancy and bank premises and equipment expense increased by $194,000
or 7.46 percent in 2000 over 1999. This increase in 2000 expense reflects the
ongoing impact on operating costs associated with the expanded branch network
and technological and automation programs. The increase in such expenses of
$239,000 or 10.1 expense in 1999 over 1998 was also attributable to the
increased operating costs of expanded bank facilities.
Other expenses decreased $112,000 or 3.8 percent in 2000 over 1999. The
decrease in expense is primarily attributable to a decrease in legal and
consulting expenses. The increase of $542,000 or 22.6 percent in such expense in
1999 over 1998 was due to increased legal and consulting costs realized in 1999
with the formation of a subsidiary company and the liquidation of another
subsidiary.
INCOME TAXES
The Corporation's provision for income taxes increased from 1999 to
2000 and similarly in 1998 to 1999, primarily as a result of higher levels of
taxable income. The effective tax rates for the Corporation for the periods
ended December 31, 2000, 1999, and 1998 were 32.3 percent, 33.7 percent and 33.9
percent, respectively. The effective tax rate continues to be less than the
combined statutory Federal tax rate of 34 percent and the New Jersey State tax
rate of 9 percent. The difference between the statutory and effective tax rates
primarily reflects the tax-exempt status of interest income on obligations of
states and political subdivisions and disallowed expense items for tax purposes,
such as travel and entertainment expense, as well as amortization of goodwill.
Tax-exempt interest income on a tax-equivalent basis, decreased by $96,000 or
10.1 percent from 1999 to 2000, and increased by $237,000 or 22.3 percent from
1998 to 1999.
25
[CENTER BANCORP, INC. LOGO]
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, No. 137 AND No. 138
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivatives and Similar Financial Instruments and for Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial condition and measures those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
This Statement was originally effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter; on that
date, hedging relationships must be designated anew and documented pursuant to
the provisions of this Statement. Earlier application of all of the provisions
of this Statement is encouraged, but is permitted only as of the beginning of
any fiscal quarter that begins after issuance of this Statement. This Statement
should not be applied retroactively to financial statements of prior periods.
In June 1999, FASB issued SFAS No 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which amended SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000.
On January 1, 2000, the Corporation adopted SFAS 133 and SFAS 138. The
transition provisions contained in SFAS 133 provide that at the date of initial
application, an entity may transfer any debt security classified as "held to
maturity (HTM)" to "available-for-sale (AFS)" or "trading". On the initial
adoption date of SFAS 133 as amended by SFAS 138, the Bank transferred
$25,357,952 (amortized cost) of its securities previously classified as held to
maturity to the available-for-sale classification. The related unrealized net
gain as of transfer date was $5,109, which has been recognized in accumulated
other comprehensive income component of stockholders' equity, as the cumulative
effect of adopting the new accounting principles.
In June 2000, the FASB issued Statement No. 138 "Accounting For Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133 and 137," effective for companies that have adopted the
provisions of FASB Statement No. 133 and 137 for fiscal quarters beginning after
June 15, 2000. The adoption of this Statement by the Corporation did not have a
material effect on the financial statements of the Corporation. The Corporation
did not have any derivative instruments or hedging activities as defined by SFAS
133 and SFAS 138.
SFAS No. 140
In September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(A Replacement of FASB Statement 125)." SFAS No. 140 supercedes and replaces the
guidance in SFAS No. 125 and, accordingly, provides guidance on the following
topics: securitization transactions involving financial assets; sales of
financial assets such as receivables, loans and securities; factoring
transactions: wash sales; servicing assets and liabilities; collateralized
26
borrowing arrangements; securities lending transactions; repurchase agreements;
loan participations, and extinguishment of liabilities. While most of the
provisions of SFAS No. 140 are effective for transactions entered into after
March 31, 2001, companies that hold beneficial interests from previous
securitizations will be required to make additional disclosures in their
December 31, 2000 financial statements. The initial adoption of SFAS No. 140 is
not expected to have a material impact on the financial statements of the
Corporation.
ASSET AND LIABILITY MANAGEMENT
Asset and Liability management encompasses an analysis of market risk,
the control of interest rate risk (interest sensitivity management) and the
ongoing maintenance and planning of liquidity and capital. The composition of
the Corporation's statement of condition is planned and monitored by the Asset
and Liability Committee (ALCO). In general, management's objective is to
optimize net interest income and minimize market risk and interest rate risk by
monitoring these components of the statement of condition.
INTEREST SENSITIVITY
MARKET RISK
"Market risk" represents the risk of loss from adverse changes in
market prices and rates. The Corporation's market rate risk arises primarily
from interest rate risk inherent in its investing, lending and deposit taking
activities. To that end, management actively monitors and manages its interest
rate risk exposure.
The Corporation's profitability is affected by fluctuations in interest
rates. A sudden and substantial increase or decrease in interest rates may
adversely 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 instruments. The management of the
Corporation believes that hedging instruments currently available are not
cost-effective, and therefore, has focused its efforts on increasing the
Corporation's yield-cost spread through wholesale and retail growth
opportunities.
The Corporation monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of the Corporation's
exposure to differential changes in interest rates between assets and
liabilities is the Corporation's analysis of its interest rate sensitivity. This
test measures the impact on net interest income and on net portfolio value of an
immediate change in interest rates in 100 basis point increments. Net portfolio
value is defined as the net present value of assets, liabilities and off-balance
sheet contracts.
The primary tool used by management to measure and manage interest rate
exposure is a simulation model. Use of the model to perform simulations
reflecting changes in interest rates over one and two-year time horizons has
enabled management to develop and initiate strategies for managing exposure to
interest rate risk. In its simulations, management estimates the impact on net
interest income of various changes in interest rates. Projected net interest
income sensitivity to movements in interest rates is modeled based on both an
immediate rise or fall in interest rates ("rate shock"), as well as gradual
changes in interest rates over a 12 month time period. The model is based on the
actual maturity and repricing characteristics of interest-rate sensitive assets
and liabilities. The model incorporates assumptions regarding earning-asset and
27
[CENTER BANCORP, INC. LOGO]
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, 2000, the Corporation would expect a decrease of 3.98 percent in net
interest income and an increase of 9.07 percent in net interest income if
interest rates increase or decrease by 200 basis points, respectively, from
current rates in an immediate and parallel shock over a twelve month period.
Short-term interest rate exposure analysis is supplemented with an
interest sensitivity gap model. The Corporation utilizes interest sensitivity
analysis to measure the responsiveness of net interest income to changes in
interest rate levels. Interest rate risk arises when an earning-asset matures or
when its interest rate changes in a time period different from that of a
supporting interest-bearing liability, or when an interest-bearing liability
matures or when its interest rate changes in a time period different from that
of an earning-asset that it supports. While the Corporation matches only a small
portion of specific assets and liabilities, total earning assets and
interest-bearing liabilities are grouped to determine the overall interest rate
risk within a number of specific time frames. The difference between interest
sensitive assets and interest sensitive liabilities is referred to as the
interest sensitivity gap. At any given point in time, the Corporation may be in
an asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities, or in a liability-sensitive position, whereby
its interest-sensitive liabilities exceed its interest-sensitive assets,
depending on management's judgment as to projected interest rate trends.
The Corporation's rate sensitivity position in each time frame may be
expressed as assets less liabilities, as liabilities less assets, or as the
ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL).
For example, a short funded position (liabilities repricing before assets) would
be expressed as a net negative position, when period gaps are computed by
subtracting repricing liabilities from repricing assets. When using the ratio
method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than
1 indicates an asset sensitive position and a ratio less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1, tends to
expand net interest margins in a falling rate environment and to reduce net
interest margins in a rising rate environment. Conversely, when a positive gap
occurs, generally margins expand in a rising rate environment and contract in a
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, 2000, the Corporation reflects a negative interest
sensitivity gap (or an interest sensitivity ratio) of .48:1.00: at the
cumulative one year position. During much of 2000, the Corporation had a
negative interest sensitivity gap. The maintenance of a liability-sensitive
position during 2000 has had an unfavorable impact on the Corporation's net
interest margins, based on management's perception that interest rates will
continue to be volatile, emphasis has been, and is expected to continue to be
placed on interest-sensitivity matching with the objective of stabilizing the
net interest spread during 2001. However, no assurance can be given that this
objective will be met.
28
The following table depicts the Corporation's interest rate sensitivity position
at December 31, 2000:
- ------------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY/PRINCIPAL REPAYMENT DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
AVERAGE YEAR YEAR YEAR YEAR YEAR
INTEREST END END END END END
(DOLLARS IN THOUSANDS) RATE 2001 2002 2003 2004 2005
- ------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING
ASSETS:
Loans 8.07% $ 57,263 $ 31,556 $ 23,538 $ 20,308 $ 16,243
Investments 7.04% 91,036 41,350 35,029 23,819 14,312
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 148,299 $ 72,906 $ 58,567 $ 44,127 $ 30,555
- ------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater 5.85% $ 57,264 $ 967 $ -- $ -- $ --
Time certificates of deposit of
less than $100,000 5.40% 54,954 2,019 299 -- --
Other interest bearing deposits 3.69% 106,006 -- -- -- --
Securities sold under agreements to
repurchase and FHLB advances 5.18% 91,262 10,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 309,486 $ 12,986 $ 299 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning assets 148,299 221,205 279,772 323,899 354,454
- ------------------------------------------------------------------------------------------------------------------
Cumulative interest-bearing
liabilities 309,486 322,472 322,771 322,771 322,771
- ------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap (161,187) 59,920 58,268 44,127 30,555
- ------------------------------------------------------------------------------------------------------------------
Cumulative rate sensitivity gap $(161,187) $(101,267) $ (42,999) $ 1,128 $ 31,683
- ------------------------------------------------------------------------------------------------------------------
Cumulative gap ratio 0.48% 0.69% 0.87% 1.00% 1.10%
==================================================================================================================
- -------------------------------------------------------------------------
2006 ESTIMATED
AND TOTAL FAIR
THEREAFTER BALANCE VALUE
- -------------------------------------------------------------------------
Loans $ 48,386 $ 197,294 $ 194,362
Investments 124,721 $ 330,267 $ 329,737
- -------------------------------------------------------------------------
Total interest-earning assets $ 173,107 $ 527,561 $ 524,099
- -------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater $ -- $ 58,231 $ 58,369
Time certificates of deposit of
less than$100,000 -- 57,272 57,112
Other interest bearing deposits 110,556 216,562 216,562
Securities sold under agreements to
repurchase and FHLB advances -- 101,262 101,262
- -------------------------------------------------------------------------
Total interest-bearing liabilities $ 110,556 $ 433,327 $ 433,305
- -------------------------------------------------------------------------
Cumulative interest-earning assets 527,561 527,561
- -------------------------------------------------------------------------
Cumulative interest-bearing
liabilities 433,327 433,327
- -------------------------------------------------------------------------
Rate sensitivity gap 62,551 94,234
- -------------------------------------------------------------------------
Cumulative rate sensitivity gap $ 94,234 $ 94,234
- -------------------------------------------------------------------------
Cumulative gap ratio 1.22% 1.22%
=========================================================================
The table above indicates the time period in which interest-earning
assets and interest-bearing liabilities will mature or may re-price in
accordance with their contractual terms. However, this table does not
necessarily indicate the impact of general interest rate movements on the
Corporation's net interest yield because the repricing of various categories of
assets and liabilities is discretionary and is subject to competitive and other
pressures. As a result, various assets and liabilities indicated as repricing
within the same period may in fact re-price at different times and at different
rate levels.
Expected maturities are contractual maturities adjusted for prepayments
of principal based on current market indices. The Corporation uses certain
assumptions to estimate fair values and expected maturities. For assets,
expected maturities are based upon contractual maturity, projected repayments
and prepayments of principal. For deposits, contractual maturities are assumed
for certificates of deposit while other interest-bearing deposits were treated
as if subject to immediate withdrawal.
LIQUIDITY
The liquidity position of the Corporation is dependent on successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise principally to accommodate possible
deposit outflows and to meet customers' requests for loans. Such needs can be
satisfied by scheduled principal loan repayments, maturing investments,
short-term liquid assets and deposit in-flows. The objective of liquidity
management is to enable the Corporation to maintain sufficient liquidity to meet
its obligations in a timely and cost-effective manner.
Management monitors current and projected cashflows, and adjusts
positions as necessary to maintain adequate levels of liquidity. By using a
29
[CENTER BANCORP, INC. LOGO]
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.
The Corporation derives a significant proportion of its liquidity from
its core deposit base. At December 31, 2000, core deposits, as defined by the
Corporation (comprised of total demand and savings accounts plus money market
accounts under $100,000) represented 54.0 percent of total deposits. More
volatile rate sensitive deposits, concentrated in certificates of deposit
$100,000 and greater, increased to 13.7 percent of total deposits from 11.2
percent at December 31, 1999. This change was due primarily to an increase in
certain municipal deposits at year end. The following table depicts the
Corporation's core deposit mix at December 31, 2000 and 1999:
CORE DEPOSIT MIX
DECEMBER 31,
------------------------------------------------------------
NET CHANGE
2000 1999 VOLUME 2000
------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE VS. 1999
- --------------------------------------------------------------------------------------------------
Demand Deposits $ 93,231 40.6 $ 94,829 39.8 $ 1,598
Interest-Bearing Demand 46,214 20.2 45,786 19.2 428
Regular Savings 64,883 25.3 71,103 29.9 (6,221)
Money Market Deposits under $100 28,003 10.9 26,399 11.1 (1,396)
- --------------------------------------------------------------------------------------------------
Total core deposits $232,331 100.0 $238,117 100.0 $ (5,591)
- --------------------------------------------------------------------------------------------------
Total deposits $425,296 $389,255 $ 36,041
- --------------------------------------------------------------------------------------------------
Core deposits to total deposits 55% 61%
==================================================================================================
Short-term borrowings can be used to satisfy daily funding needs.
Balances in those accounts fluctuate on a day-to-day basis. The Corporation's
principal short-term funding sources are securities sold under agreement to
repurchase. Average short-term borrowings during 2000 amounted to approximately
$35.2 million, an increase of $15.7 million or 80.7 percent from the 1999
period.
The following table is a summary of securities sold under repurchase
agreements for each of the last three years.
DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Average Interest rate:
At year end 4.65% 3.09% 3.71%
For the year 4.46% 3.24% 3.40%
Average amount outstanding during the year: $ 35,205 $ 19,484 $ 8,455
Maximum amount outstanding at any month end: $ 51,262 $ 30,752 $ 15,063
Amount outstanding at year end: $ 51,262 $ 30,752 $ 11,602
======================================================================================
CASH FLOWS
The consolidated statements of cash flows present the changes in cash
and cash equivalents from operating, investing and financing activities. During
2000 cash and cash equivalents (which increased overall by $3.6 million) were
provided (on a net basis) by operating and financing activities and used (on a
net basis) in investing activities. Cash flows from operating activities,
primarily net income, and financing activities, primarily increases in
short-term borrowings and deposits, were used in investing activities, primarily
the increased volume of loans and investment securities.
30
STOCKHOLDERS' EQUITY
Stockholders' equity averaged $37.3 million during 2000, an increase of
$65,000 or .17 percent, as compared to 1999. At December 31, 2000, stockholders'
equity totaled $39.2 million, an increase of $2.7 million from December 31,
1999. Such increase resulted from an increase of $2.2 million of net unrealized
gains (net of tax) on securities available-for-sale, net increases of $452,000
attributable to net income and issuance of common stock less the repurchase of
common stock and cash dividends paid. The Corporation's dividend reinvestment
and optional stock purchase plan contributed $373,000 in new capital during
2000. Book value per share at year-end 2000 was $10.52 compared to $9.62 at
year-end 1999. Tangible book value at year-end 2000 was $9.87 compared to $8.90
for 1999.
On July 24, 2000, the Corporation purchased an aggregate of 117,246
shares of it common stock, in a negotiated private transaction, at a total
purchase price of $2,931,150. The repurchased shares were recorded as Treasury
Stock, which resulted in a decrease to stockholders equity.
CAPITAL
The maintenance of a solid capital foundation continues to be a primary
goal for the Corporation. Accordingly, capital plans and dividend policies are
monitored on an ongoing basis. The most important objective of the capital
planning process is to balance effectively the retention of capital to support
future growth and the goal of providing stockholders with an attractive
long-term return on their investment.
RISK-BASED CAPITAL/LEVERAGE
At December 31, 2000, the Corporation's total Tier l capital (defined
as tangible stockholders' equity for common stock and certain perpetual
preferred stock) amounted to $36.4 million or 6.58 percent of total assets. The
Tier I leverage capital ratio was 6.60 percent of total average assets. Tier I
capital excludes the effect of SFAS No. 115, which amounted to $340,000 of net
unrealized gains, after tax, on securities available-for-sale (reported as a
component of accumulated other comprehensive income which is included in
stockholders' equity), and goodwill of $2,414,000 as of December 31, 2000. For
information on goodwill, see Note 2 to the Consolidated Financial Statements.
United States bank regulators have additionally issued guidelines establishing
minimum capital standards related to the level of assets and off balance-sheet
exposures adjusted for credit risk. Specifically, these guidelines categorized
assets and off balance-sheet items into four risk-weightings and require banking
institutions to maintain a minimum ratio of capital to risk-weighted assets. At
December 31, 2000, the Corporation's estimated Tier I and total risk-based
capital ratios were 12.9 percent and 13.5 percent, respectively. These ratios
are well above the minimum guidelines of capital to risk-adjusted assets in
effect as of December 31, 2000. For information on risk-based capital and
regulatory guidelines for the Bank, see Note 10 to the Consolidated Financial
Statements.
SECURITY MARKET INFORMATION
The common stock of the Corporation is traded on the NASDAQ Stock
Market. The Corporation's symbol is CNBC. As of December 31, 2000, the
Corporation had 581 common stockholders of record. This does not include
beneficial owners for whom CEDE & Company or others act as nominees. On December
31, 2000, the closing market bid and asked price was $21.00-$21.25,
respectively.
31
[CENTER BANCORP, INC. LOGO]
The following table sets forth the high and low bid prices, and
dividends declared for the Corporation's common stock during the periods
indicated.
COMMON STOCK PRICE
COMMON DIVIDENDS
2000 1999 DECLARED
- ------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
BID BID BID BID 2000 1999
- ------------------------------------------------------------------------------------------
Fourth Quarter $ 21.00 $ 14.50 $ 15.38 $ 13.00 $ 0.15 $ 0.15
Third Quarter $ 18.75 $ 13.00 $ 14.75 $ 13.25 $ 0.15 $ 0.14
Second Quarter $ 21.63 $ 15.13 $ 15.72 $ 14.13 $ 0.15 $ 0.14
First Quarter $ 17.13 $ 13.50 $ 15.95 $ 14.28 $ 0.15 $ 0.14
- ------------------------------------------------------------------------------------------
$ 0.60 $ 0.58
==========================================================================================
For information on dividend restrictions and capital requirements,
which may limit the ability of the Corporation to pay dividends, see Note 13 to
the Consolidated Financial Statements. Dividends declared on common stock (on a
per share basis) and stock prices have been adjusted for the 5 percent stock
dividend distributed on June 1, 1999.
LOOKING FORWARD
One of the Corporation's primary objectives is to achieve balanced
asset and revenue growth, and at the same time expand market presence and
diversify its financial products. However, it is recognized that objectives, no
matter how focused, are subject to factors beyond the control of the
Corporation, which can impede its ability to achieve these goals. The following
factors should be considered when evaluating the Corporation's ability to
achieve its objectives:
The financial market place is rapidly changing. Banks are no longer the
only place to obtain loans, nor the only place to keep financial assets. The
banking industry has lost market share to other financial service providers. The
future is predicated on the Corporation's ability to adapt its products, provide
superior customer service and compete in an ever-changing marketplace.
Net interest income, the primary source of earnings, is impacted
favorably or unfavorably by changes in interest rates. Although the impact of
interest rate fluctuations is mitigated by ALCO strategies, significant changes
in interest rates can have an adverse impact on profitability.
The ability of customers to repay their obligations is often impacted
by changes in the regional and local economy. Although the Corporation sets
aside loan loss provisions toward the allowance for loan losses, significant
unfavorable changes in the economy could impact the assumptions used in the
determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial
service companies compete for and deliver services. It is recognized that these
changes will have a direct impact on how the marketplace is approached and
ultimately on profitability. The Corporation has already taken steps to improve
its traditional delivery channels. However, continued success will likely be
measured by the ability to react to future technological changes.
This "Looking Forward" description constitute 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 and in other sections of
this Annual Report.
32
AVERAGE STATEMENTS OF CONDITION WITH
INTEREST AND AVERAGE RATES
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(TAX-EQUIVALENT BASIS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable $ 290,405 $ 20,079 6.91% $ 281,582 $ 18,585 6.60%
Non-taxable 17,195 1,202 6.99% 19,128 1,298 6.79%
Federal funds sold and
securities purchased under
agreement to resell 5,924 376 6.35% 8,813 452 5.13%
Loans, net of unearned
income:(2) 185,846 14,407 7.75% 160,208 12,198 7.61%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets: 499,370 36,064 7.22% 469,731 32,533 6.93%
===========================================================================================================================
Non-interest earning assets:
Cash and due from banks 16,648 13,798
Other assets 20,259 18,496
Allowance for possible
loan losses (1,513) (1,359)
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest
earning assets 35,394 30,935
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 534,764 $ 500,666
===========================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market deposits $ 75,904 2,491 3.28% $ 69,831 2,148 3.08%
Savings deposits 90,644 2,698 2.98% 74,393 1,449 1.95%
Time deposits 116,449 6,249 5.37% 122,478 5,676 4.63%
Other interest-bearing
deposits 45,568 806 1.77% 46,378 740 1.60%
Short term borrowings
and FHLB advances 75,998 3,939 5.18% 62,713 2,788 4.45%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 404,563 16,183 4.00% 375,793 12,801 3.41%
============================================================================================================================
Non-interest-bearing liabilities:
Demand deposits 88,858 84,140
Other non-interest bearing
deposits 466 397
Other liabilities 3,614 3,138
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing
liabilities 92,938 87,675
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 37,263 37,198
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 534,764 $ 500,666
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $ 19,881 $ 19,732
- ---------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.22% 3.52%
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income as percent of
earning assets (margin) 3.98% 4.20%
- ---------------------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (3) (409) (441)
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 19,472 $ 19,291
===========================================================================================================================
(RESTUBBED TABLE)
1998
- ---------------------------------------------------------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
ASSETS
Interest-earning assets:
Investment securities:(1)
Taxable $ 281,312 $ 18,512 6.58%
Non-taxable 14,994 1,061 7.08%
Federal funds sold and
securities purchased under
agreement to resell 9,986 550 5.51%
Loans, net of unearned
income:(2) 138,967 10,924 7.86%
- ---------------------------------------------------------------------------------
Total interest-earning assets: 445,259 31,047 6.97%
- ---------------------------------------------------------------------------------
Non-interest earning assets:
Cash and due from banks 12,285
Other assets 17,569
Allowance for possible
loan losses (1,314)
- ---------------------------------------------------------------------------------
Total non-interest
earning assets 28,540
- ---------------------------------------------------------------------------------
Total assets $ 473,799
=================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Money market deposits $ 60,061 1,776 2.96%
Savings deposits 75,329 1,666 2.21%
Time deposits 152,749 7,942 5.20%
Other interest-bearing
deposits 43,077 767 1.78%
Short term borrowings
and FHLB advances 30,675 1,422 4.64%
- ---------------------------------------------------------------------------------
Total interest-bearing liabilities 361,891 13,573 3.75%
=================================================================================
Non-interest-bearing liabilities:
Demand deposits 72,564
Other non-interest bearing
deposits 438
Other liabilities 3,410
- ---------------------------------------------------------------------------------
Total non-interest bearing
liabilities 76,412
- ---------------------------------------------------------------------------------
Stockholders' equity 35,496
- ---------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 473,799
- ---------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $ 17,474
- ---------------------------------------------------------------------------------
Net interest spread 3.22%
- ---------------------------------------------------------------------------------
Net interest income as percent of
earning assets (margin) 3.92%
- ---------------------------------------------------------------------------------
Tax-equivalent adjustment (3) (361)
- ---------------------------------------------------------------------------------
Net interest income $ 17,113
=================================================================================
(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.
33
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
- ---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 3) $ 22,274 $ 18,675
Investment securities held to maturity (approximate market
value of $173,224 in 2000 and $176,542 in 1999) 173,754 183,450
Investment securities available-for-sale 156,513 120,490
- ---------------------------------------------------------------------------------------------
Total investment securities (Note 4) 330,267 303,940
Loans, net of unearned income (Note 5) 198,949 169,089
Less--Allowance for loan losses (Note 5) 1,655 1,423
- ---------------------------------------------------------------------------------------------
Net loans 197,294 167,666
Premises and equipment, net (Note 6) 10,045 9,778
Accrued interest receivable 5,839 4,727
Other assets (Note 9) 1,420 2,102
Goodwill (Note 2) 2,414 2,736
- ---------------------------------------------------------------------------------------------
Total assets $ 569,553 $ 509,624
=============================================================================================
LIABILITIES
Deposits:
Non-interest bearing $ 93,231 $ 94,829
Interest bearing:
Certificates of deposit $100,000 and over 58,231 43,641
Savings and Time Deposits 273,834 250,785
- ---------------------------------------------------------------------------------------------
Total Deposits 425,296 389,255
Federal funds purchased and securities sold under agreements
to repurchase (Note 7) 51,262 30,752
Federal Home Loan Bank Advances (Note 7) 50,000 50,000
Accounts payable and accrued liabilities (Notes 8 and 9) 3,813 3,104
- ---------------------------------------------------------------------------------------------
Total liabilities 530,371 473,111
- ---------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY (Notes 10 and 13)
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,270,020 and 4,253,441
shares in 2000 and 1999, respectively 11,015 10,760
Additional paid in capital 4,049 3,807
Retained earnings 28,308 25,568
Treasury stock at cost (544,491 and 458,964 shares in 2000 and
1999, respectively) (4,474) (1,674)
Restricted stock (Note 8) (56) (71)
Accumulated other comprehensive income (loss) 340 (1,877)
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 39,182 36,513
- ---------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 569,553 $ 509,624
=============================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 14,407 $ 12,198 $ 10,924
Interest and dividends on investment securities:
Taxable interest income 19,586 18,241 18,315
Non-taxable interest income 793 857 700
Dividends 493 344 197
Interest on Federal funds sold and securities purchased under
agreement to resell 376 452 550
- ------------------------------------------------------------------------------------------------------------------
Total interest income 35,655 32,092 30,686
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on certificates of deposit $100,000 and over 3,482 2,703 4,301
Interest on other deposits 8,762 7,310 7,850
Interest on borrowings 3,939 2,788 1,422
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 16,183 12,801 13,573
- ------------------------------------------------------------------------------------------------------------------
Net interest income 19,472 19,291 17,113
Provision for loan losses (Note 5) 363 108 120
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 19,109 19,183 16,993
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees 1,301 863 748
Other income 410 228 223
Loss on securities sold (Note 4) (78) (2) --
- ------------------------------------------------------------------------------------------------------------------
Total other income 1,633 1,089 971
- ------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits (Note 8) 6,800 6,772 6,005
Occupancy, net (Note 14) 1,340 1,251 1,063
Premises and equipment (Notes 6 and 14) 1,453 1,348 1,297
Stationery and printing 432 471 438
Marketing and advertising 490 504 446
Other 2,832 2,944 2,402
- ------------------------------------------------------------------------------------------------------------------
Total other expense: 13,347 13,290 11,651
- ------------------------------------------------------------------------------------------------------------------
Income before income tax expense 7,395 6,982 6,313
Income tax expense (Note 9) 2,390 2,353 2,141
- ------------------------------------------------------------------------------------------------------------------
Net income $ 5,005 $ 4,629 $ 4,172
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 1.33 $ 1.23 $ 1.12
Diluted $ 1.32 $ 1.22 $ 1.10
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,774,482 3,775,846 3,741,478
Diluted 3,794,323 3,799,680 3,777,390
==================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- -------------------------------------------------------------------------------------------------------------------------------
COMMON
STOCK COMMON ADDITIONAL
SHARES STOCK PAID IN RETAINED TREASURY RESTRICTED
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK STOCK
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,542,171 $ 7,296 $ 3,513 $ 23,829 $ (1,808) $--
- -------------------------------------------------------------------------------------------------------------------------------
YEAR 1998
Cash dividend (2,023)
Issuance of common stock 18,264
Exercise of stock options 17,714 147 72
Comprehensive income:
Net income 4,172
Unrealized holding gain on secu-
rities arising during the period
(net of taxes of $347)
Total comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 3,578,149 $ 7,616 $ 3,660 $ 25,978 $ (1,736) $--
- -------------------------------------------------------------------------------------------------------------------------------
YEAR 1999
Cash dividend (2,213)
Common stock dividend 179,260 2,826 (2,826)
Issuance of common stock 20,920 318
Exercise of stock options 11,600 93 45
Restricted stock award 4,548 54 17 (71)
Comprehensive income:
Net income 4,629
Unrealized holding losses on
securities arising during the
period (net of taxes of ($1,540))
Less reclassification adjustment
for losses included in net
income (net of tax benefit $1)
Net unrealized holding loss on
securities arising during the
period (net of tax of ($1,541))
Total comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31,1999 3,794,477 $ 10,760 $ 3,807 $ 25,568 $ (1,674) $ (71)
- -------------------------------------------------------------------------------------------------------------------------------
YEAR 2000
Cumulative effect of a change in
accounting principle
(net of tax of $2)
Cash dividend (2,265)
Issuance of common stock 16,579 255
Exercise of stock options 31,719 242 131
Restricted stock award 15
Repurchase of common stock (117,246) (2,931)
Comprehensive income:
Net income 5,005
Unrealized holding gains on
securities arising during the
period (net of tax of $1,499)
Less reclassification adjustment
for losses included in net
income (net of tax benefit of $27)
Net unrealized holding gain on
securities arising during the
period (net of tax $1,474)
Total comprehensive income
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 3,725,529 $ 11,015 $ 4,049 $ 28,308 $ (4,474) $ (56)
- -------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------
ACCUMULATED TOTAL
OTHER STOCK
COMPREHENSIVE HOLDERS'
INCOME (LOSS) EQUITY
- ---------------------------------------------------------------------
Balance, December 31, 1997 $ 592 $ 33,422
- ---------------------------------------------------------------------
YEAR 1998
Cash dividend (2,023)
Issuance of common stock 320
Exercise of stock options 219
Comprehensive income:
Net income 4,172
Unrealized holding gain on secu-
rities arising during the period
(net of taxes of $347) 521 521
------------------------
Total comprehensive income
4,693
- ---------------------------------------------------------------------
Balance December 31, 1998 $ 1,113 $ 36,631
- ---------------------------------------------------------------------
YEAR 1999
Cash dividend (2,213)
Common stock dividend
Issuance of common stock 318
Exercise of stock options 138
Restricted stock award
Comprehensive income:
Net income 4,629
Unrealized holding losses on
securities arising during the
period (net of taxes of ($1,540))
Less reclassification adjustment (2,991)
for losses included in net
income (net of tax benefit $1) 1
-----------
Net unrealized holding loss on
securities arising during the
period (net of tax of ($1,541)) (2,990) (2,990)
----------
Total comprehensive income 1,639
- ---------------------------------------------------------------------
Balance December 31,1999 $ (1,877) $ 36,513
- ---------------------------------------------------------------------
YEAR 2000
Cumulative effect of a change in
accounting principle
(net of tax of $2) 5
Cash dividend (2,265)
Issuance of common stock 255
Exercise of stock options 373
Restricted stock award 15
Repurchase of common stock (2,931)
Comprehensive income:
Net income 5,005
Unrealized holding gains on
securities arising during the
period (net of tax of $1,499) 2,263
Less reclassification adjustment
for losses included in net
income (net of tax benefit of $27) (51)
----------
Net unrealized holding gain on
securities arising during the
period (net of tax $1,474) 2,217 2,217
----------
Total comprehensive income 7,222
- ---------------------------------------------------------------------
Balance December 31, 2000 $ 340 $ 39,182
=====================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,005 $ 4,629 $ 4,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,543 1,465 1,413
Provision for loan losses 363 108 120
Provision for deferred taxes (326) (267) 108
Loss on sale of investment securities available-for-sale 78 2 --
(Increase) decrease in accrued interest receivable (1,112) (607) 230
Decrease (increase) in other assets 935 (1,024) (236)
Incease (decrease) in other liabilities 709 (492) 973
Gain on sale of other real estate owned (102) -- --
Proceeds from the sale of other real estate owned 175 -- --
Amortization of premium and accretion of discount on
investment securities, net 39 7 179
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,307 3,821 6,959
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale 22,127 25,871 63,914
Proceeds from maturities of investment securities held to maturity 15,371 54,178 80,494
Proceeds from redemption of FHLB stock 4,803 -- --
Proceeds from sales of investment securities available-for-sale 26,357 2,997 --
Purchase of securities available-for-sale (62,542) (35,743) (63,817)
Purchase of securities held to maturity (30,343) (66,272) (69,917)
Net increase in loans (29,991) (19,001) (17,738)
Property and equipment expenditures, net (1,488) (1,494) (1,386)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (55,706) (39,464) (8,450)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 36,041 12,088 (58,843)
Dividends paid (2,265) (2,213) (2,023)
Proceeds from issuance of common stock 643 318 320
Repurchase of common stock (2,931) -- --
Net increase in short-term borrowings 20,510 28,150 51,902
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 51,998 38,343 (8,644)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,599 2,700 (10,135)
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 18,675 15,975 26,110
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 22,274 $ 18,675 $ 15,975
- ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ----------------------------------------------------------------------------------------------------------------
Interest paid on deposits and short term borrowings $ 15,851 $ 12,293 $ 13,465
Income taxes $ 2,278 $ 2,505 $ 2,005
Transfer of investment securities held to maturity
to investment securities available-for-sale $ 25,358 $ -- $ --
================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp, Inc. (the
Corporation) are prepared on the accrual basis and include the accounts of the
Corporation and its wholly owned subsidiary, Union Center National Bank and its
subsidiaries (the Bank). All significant intercompany accounts and transactions
have been eliminated from the accompanying consolidated financial statements.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers through branch locations in Union and Morris Counties, New
Jersey. The Bank is subject to competition from other financial institutions, is
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of condition and revenues and
expenses for that period. Actual results could differ significantly from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, Federal
funds sold and securities purchased under agreements to resell. Generally,
Federal funds and securities purchased under agreements to resell are sold for
one-day periods.
INVESTMENT SECURITIES
The Corporation classifies investments into the following categories:
(1) held to maturity securities, for which the Corporation has both the positive
intent and ability to hold until maturity, are reported at amortized cost; (2)
trading securities, which are purchased and held principally for the purpose of
selling in the near term, are reported at fair value with unrealized gains and
losses included in earnings; and (3) available-for-sale securities, which do not
meet the criteria of the other two categories, are reported at fair value with
unrealized gains and losses, net of applicable income taxes, reported as a
component of accumulated other comprehensive income which is included in
stockholders' equity and excluded from earnings.
Investment securities held to maturity are adjusted for amortization of
premiums and accretion of discounts, which are recognized on a level yield
method, as adjustments to interest income. Investment securities gains or losses
are determined using the specific identification method.
38
INCOME TAXES
The Corporation recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates
expected to apply to taxable income in the years in which the differences are
expected to be settled.
LOANS
Loans are stated at their principal amounts less net deferred loan
origination fees. Interest income is credited as earned except when a loan
becomes past due 90 days or more and doubt exists as to the ultimate collection
of interest or principal; in those cases the recognition of income is
discontinued. When a loan is placed on non-accrual, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to the loan's yield.
The value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or at the fair value
of the collateral if the loan is collateral dependent. Impaired loans include,
at a minimum, non-accrual loans and loans internally classified as substandard
or below, in each instance above an established dollar threshold of $200,000.
All loans below the established dollar threshold are considered homogenous and
are collectively evaluated for impairment.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level determined
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to operations and reduced by loan charge-offs, net of
recoveries. The allowance is based on management's evaluation of the loan
portfolio considering economic conditions, the volume and nature of the loan
portfolio, historical loan loss experience and individual credit situations.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan
losses. In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
The ultimate 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, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examinations.
39
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
BANK PREMISES AND EQUIPMENT
Land is carried at cost and bank premises and equipment at cost less
accumulated depreciation based on estimated useful lives of assets, computed
principally on the straight-line basis. Expenditures for maintenance and repairs
are charged to operations as incurred; major renewals and betterments are
capitalized. Gains and losses on sales or other dispositions are recorded as
other income or other expenses.
PENSION PLAN
The Corporation has a non-contributory pension plan covering all
eligible employees. The Corporation's policy is to fund at least the minimum
contribution required by the Employee Retirement Income Security Act of 1974.
The costs associated with the plan are accrued based on actuarial assumptions
and included in non-interest expense.
STOCK BASED COMPENSATION
The Corporation accounts for stock options using the intrinsic value
method under APB Opinion No. 25 and provides the required disclosures of fair
values under SFAS No. 123, "Accounting for Stock-Based Compensation."
EARNINGS PER SHARE
All share and per share amounts have been restated to reflect the 5%
stock dividend distributed on June 1, 1999, and the three-for-two stock split
distributed in May of 1998.
Basic Earnings Per Share (EPS) is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes any additional common shares as if all
potentially dilutive common shares were issued (e.g. stock options). The
Corporation's weighted average common shares outstanding for diluted EPS include
the effect of stock options outstanding using the Treasury Stock Method, which
are not included in the calculation of basic EPS.
Earnings per common share have been computed based on the following:
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income $5,005 $4,629 $4,172
- --------------------------------------------------------------------------------
Average number of common shares outstanding 3,774 3,776 3,741
Effect of dilutive options 16 22 36
Effect of restricted stock awards 4 2 --
- --------------------------------------------------------------------------------
Average number of common shares outstanding used to
calculate diluted earnings per common share 3,794 3,800 3,777
================================================================================
TREASURY STOCK
Treasury stock is recorded using the cost method and accordingly is
presented as a reduction of stockholders' equity. On July 24, 2000, the
Corporation purchased an aggregate of 117,246 shares of it common stock, in a
negotiated private transaction, at a total purchase price of $2,931,150. The
repurchased shares were recorded as Treasury Stock, which resulted in a decrease
to stockholders' equity.
40
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 Bank's other comprehensive income is comprised of unrealized
holding gains and losses on securities available-for-sale. Disclosure of
comprehensive income for the years ended 2000, 1999, and 1998 is presented in
the Consolidated Statements of Changes in Stockholders' Equity.
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 1999 and 1998 to conform to the classifications presented in
2000.
NOTE 2: ACQUISITION
- -------------------
On June 28, 1996, the Corporation acquired Lehigh Savings Bank SLA
(Lehigh), a New Jersey chartered savings and loan association in a transaction
accounted for under the purchase method of accounting. At June 28, 1996, Lehigh
had assets of $70.9 million (primarily cash and cash equivalents of $53.0
million and loans of $15.0 million) and deposits and stockholders' equity of
$68.2 million and $2.7 million, respectively. The Corporation paid $5.5 million
in cash for Lehigh, resulting in goodwill of $3.8 million. The goodwill is being
amortized on a straight-line basis over 15 years. The consolidated financial
statements of the Corporation include assets, liabilities and results of
operations of Lehigh since the acquisition date.
NOTE 3: CASH AND DUE FROM BANKS
- -------------------------------
The subsidiary bank, Union Center National Bank, maintained cash
balances reserved to meet regulatory requirements of the Federal Reserve Board
of approximately $28,000 and $189,000 at December 31, 2000 and 1999,
respectively.
NOTE 4: INVESTMENT SECURITIES
- -----------------------------
The following tables present information related to the Corporation's
portfolio of securities held to maturity and available-for-sale at December 31,
2000 and 1999.
DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
U.S. government and federal agency obligations $130,115 $ 72 $ 765 $129,422
Obligations of U.S. States and political subdivisions 24,500 106 58 24,548
Other securities 19,139 115 -- 19,254
- ----------------------------------------------------------------------------------------------------
$173,754 $ 293 $ 823 $173,224
====================================================================================================
DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. government and federal agency obligations $105,331 $ 213 $ 217 $105,327
Obligations of U.S. states and political subdivisions 9,080 10 1 9,089
Other securities 35,738 560 -- 36,298
FHLB Stock and other equity securities 5,799 -- -- 5,799
- ----------------------------------------------------------------------------------------------------
$155,948 $ 783 $ 218 $156,513
====================================================================================================
41
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 4: INVESTMENT SECURITIES continued
DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
U.S. Government and federal agency obligations $126,990 $ 108 $ 5,863 $121,235
Obligations of U.S. states and political subdivisions 36,939 53 879 36,113
Other securities 19,521 13 340 19,194
- ----------------------------------------------------------------------------------------------------
$183,450 $ 174 $ 7,082 $176,542
====================================================================================================
DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. Government and federal agency obligations $ 88,300 $ 100 $ 2,665 $ 85,735
Obligations of U.S. States and political subdivisions 13,674 1 374 13,304
Other securities 14,879 4 191 14,689
FHLB stock and other equity securities 6,762 -- -- 6,762
- ----------------------------------------------------------------------------------------------------
$123,615 $ 105 $ 3,230 $120,490
====================================================================================================
The following table presents information for investments in securities
held to maturity and debt securities available-for-sale at December 31, 2000,
based on scheduled maturities. Actual maturities can be expected to differ from
scheduled maturities due to prepayment or early call privileges of the issuer.
HELD TO MATURITY AVAILABLE-FOR-SALE
- ---------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------------------------------------------------------------------------
Due in one year or less $ 8,754 $ 8,691 $ 32,613 $ 32,705
Due after one year through five years 56,550 56,816 57,053 57,284
Due after five years through ten years 42,520 42,537 31,431 31,827
Due after ten years 65,930 65,180 34,851 34,697
- ---------------------------------------------------------------------------------------
$173,754 $173,224 $155,948 $156,513
=======================================================================================
During 2000, securities sold from the Corporation's available-for-sale
portfolio amounted to approximately $26.4 million. The gross realized losses on
securities sold amounted to $111,989, while the gross realized gains amounted to
$33,143 in 2000. Securities sold from the Corporation's available-for-sale
portfolio during 1999 amounted to $3.0 million with a gross realized loss of
$2,400. These securities were sold in the ordinary course of business. During
1998, the Corporation did not sell any securities from its available-for-sale
portfolio.
On January 1, 2000, the Corporation adopted SFAS 133 and SFAS 138. The
transition provisions contained in SFAS 133 provide that at the date of initial
application, an entity may transfer any debt security classified as "held to
maturity (HTM)" to "available-for-sale (AFS)" or "trading". On the initial
adoption date of SFAS 133 as amended by SFAS 138, the Bank transferred
$25,357,952 (amortized cost) of its securities previously classified as held to
maturity to the available-for-sale classification. The related unrealized net
gain as of transfer date was $5,109, which has been recognized in accumulated
other comprehensive income component of stockholders' equity, as the cumulative
effect of adopting the new accounting principles. The Corporation did not have
any derivative instruments or hedging activities as defined by SFAS 133 and SFAS
138.
42
Investment securities having a carrying value of approximately $137.4
million and $63.9 million at December 31, 2000 and 1999, respectively, were
pledged to secure public deposits, short-term borrowings, FHLB advances and for
other purposes required or permitted by law.
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------
The following table sets forth the composition of the Corporation's
loan portfolio at December 31, 2000 and 1999, respectively.
(DOLLARS IN THOUSANDS) 2000 1999
- -------------------------------------------------------------------------------
Real estate--residential mortgage $ 117,762 $ 99,800
Real estate--commercial 36,830 24,484
Commercial and industrial 38,450 37,377
Installment 4,893 7,100
All other 1,014 569
Less unearned income -- (241)
- -------------------------------------------------------------------------------
Loans, net of unearned income $ 198,949 $ 169,089
===============================================================================
At December 31, 2000 and 1999 loans to officers and directors
aggregated approximately $3,582,000 and $3,506,000 respectively. During the year
ended December 31, 2000, the Corporation made new loans to officers and
directors in the amount of $981,000; payments by such persons during 2000
aggregated $905,000. Management is of the opinion that the above loans were made
on the same terms and conditions as those prevailing for comparable transactions
with non-related borrowers. A summary of the activity in the allowance for loan
losses is as follows:
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
Balance at the beginning of year $ 1,423 $ 1,326 $ 1,269
Provision for loan losses 363 108 120
Loans charged-off (135) (23) (70)
Recoveries on loans previously charged-off 4 12 7
- --------------------------------------------------------------------------------
Balance at the end of year $ 1,655 $ 1,423 $ 1,326
================================================================================
Total non-performing assets are comprised of the outstanding balances
of accruing loans which are 90 days or more past due as to principal or interest
payments, non-accrual loans and other real estate owned. Total non-performing
assets at December 31, 2000, 1999 and 1998 were as follows:
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
Loans past due in excess of 90 days and still accruing $ 2 $-- $ 24
Non-accrual loans 246 292 41
Other real estate owned 49 73 73
- --------------------------------------------------------------------------------
Total non-performing assets $297 $365 $138
================================================================================
The amount of interest income that would have been recorded on
non-accrual loans in 2000, 1999 and 1998 had payments remained in accordance
with the original contractual terms, approximated $19,000, $15,000 and $3,000
respectively, while no interest income was received on these types of assets in
2000, 1999 and 1998.
At December 31, 2000, total impaired loans were approximately
$1,461,000; compared to $519,000 at December 31, 1999. Although classified as
substandard, the impaired loans were current with respect to principal and
interest payments. The Corporation's total average impaired loans were
$1,484,000 during 2000, $493,000 during 1999 and $0 during 1998. Interest income
on impaired loans totaled $138,390 in 2000, $41,430 in 1999 and $0 in 1998.
At December 31, 2000, there were no commitments to lend additional
funds to borrowers whose loans were non-accrual or contractually past due in
excess of 90 days and still accruing interest.
43
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES continued
The policy of the Bank is to generally grant commercial, mortgage and
installment loans to New Jersey residents and businesses within its trading
area. The borrowers' abilities to repay their obligations are dependent upon
various factors including the borrowers' income and net worth, cash flows
generated by the borrowers' underlying collateral, value of the underlying
collateral, and priority of the Bank's lien on the property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the control of the Bank. The Bank is therefore subject to risk of loss. The Bank
believes its lending policies and procedures adequately minimize the potential
exposure to such risks and that adequate provision for loan losses are provided
for all known and inherent risks. Collateral and/or personal guarantees are
required for virtually all loans.
NOTE 6: BANK PREMISES AND EQUIPMENT
- -----------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------------------------
Land $ 2,403 $ 1,649
Buildings 6,174 6,017
Furniture, fixtures and equipment 8,937 8,549
Leasehold improvements 1,441 1,410
==============================================================================
Subtotal 18,955 17,625
Less accumulated depreciation and amortization 8,910 7,847
- ------------------------------------------------------------------------------
Total $10,045 $ 9,778
==============================================================================
Depreciation expense for the three years ended December 31, 2000
amounted to $1,220,560 in 2000, $1,142,743 in 1999 and $1,090,733 in 1998,
respectively.
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
- ------------------------------------------------------------
At December 31, 2000 and 1999, advances from the Federal Home Loan Bank
of New York (FHLB) amounted to $50,000,000. The FHLB advances have a weighted
average interest rate of 5.50 percent and 5.35 percent at December 31, 2000 and
December 31, 1999, respectively. These advances are secured by pledges of FHLB
stock, 1-4 family residential mortgages and U.S. Government and Federal Agency
obligations. The advances are subject to quarterly call provisions at the
discretion of the FHLB while others have fixed maturity dates and at December
31, 2000, and 1999 are contractually scheduled for repayment as follows:
(DOLLARS IN THOUSANDS) 2000 1999
- ------------------------------------------------------------------------------
2000 $ -- $50,000
2010 50,000 --
- ------------------------------------------------------------------------------
TOTAL $50,000 $50,000
==============================================================================
Other borrowings consisting of securities sold under agreements to
repurchase had average balances of $35,205,000, $19,484,000, and $8,455,000, for
the years ended December 31, 2000, 1999 and 1998, respectively. The maximum
amount outstanding at any month end during 2000, 1999 and 1998, respectively,
was $51,262,000, $30,752,000 and $15,063,000.
44
NOTE 8: PENSION AND BENEFITS
- ----------------------------
The Corporation maintains a non-contributory pension plan for
substantially all of its employees. The benefits are based on years of service
and the employee's compensation over the prior five-year period. The plan's
assets consist primarily of an insurance annuity. In addition, the Corporation
has a non-qualified retirement plan that is designed to supplement the pension
plan for key employees.
In 1998, the Corporation adopted a Director's Retirement Plan, which is
designed to provide retirement benefits for members of the Board of Directors.
The expense associated with the plan amounted to $66,000 in 2000 and $116,359
for 1999 and 1998, respectively, and is included in non-interest expense.
The following table sets forth change in projected benefit obligation,
change in fair value of plan assets, funded status, and amounts recognized in
the consolidated statements of condition for the Corporation's pension plans at
December 31, 2000 and 1999.
CHANGE IN BENEFIT OBLIGATION (DOLLARS IN THOUSANDS) 2000 1999
- --------------------------------------------------------------------------------
Projected benefit obligation at beginning of year $ 5,426 $ 4,578
Service cost 382 335
Interest cost 385 334
Actuarial (gain) loss (630) 414
Benefits paid (239) (235)
- --------------------------------------------------------------------------------
Projected benefit obligation at end year $ 5,324 $ 5,426
================================================================================
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning year $ 4,486 $ 4,369
Actual return on plan assets (95) 281
Employer contributions 371 71
Benefits paid (239) (235)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,523 $ 4,486
- --------------------------------------------------------------------------------
Funded status $ (801) $ (940)
Unrecognized net asset (7) (10)
Unrecognized prior service cost 110 125
Unrecognized net actuarial gain (682) (540)
- --------------------------------------------------------------------------------
Accrued benefit cost $(1,380) $(1,365)
================================================================================
The net periodic pension cost for 2000, 1999 and 1998 includes the
following components.
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $ 382 $ 335 $ 332
Interest cost 385 334 328
Expected return on plan assets (376) (281) (415)
Net amortization and deferral (6) (69) 115
- --------------------------------------------------------------------------------
Net periodic pension expense $ 385 $ 319 $ 360
================================================================================
The following table presents the assumptions used to calculate the
projected benefit obligation in each of the last three years.
2000 1999 1998
- --------------------------------------------------------------------------------
Discount rate 8.00% 7.50% 7.50%
Rate of compensation increase 7.00% 6.50% 6.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
================================================================================
45
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 8: PENSION AND BENEFITS continued
401K BENEFIT PLAN
- -----------------
The Corporation maintains a 401K employee savings plan to provide for
defined contributions which covers substantially all employees of the Bank. The
Corporation's contributions to the plan are limited to fifty percent of a
matching percentage of each employee's contribution up to six percent of the
employee's salary. For 2000, 1999, and 1998, employer contributions amounted to
$82,085, $74,099 and $ 61,691, respectively.
STOCK OPTION PLANS
- ------------------
The Stock Option Plans permit Center Bancorp, Inc. common stock to be
issued to key employees and directors of the Corporation and its subsidiary. The
options granted under the plans are intended to be either Incentive Stock
Options or Non-qualified Options. Under the 1999 Employee Stock Incentive an
aggregate of 179,000 shares are authorized for issuance. Such shares may be
treasury shares, newly issued shares or a combination thereof.
This Plan permits Center Bancorp, Inc. common stock to be issued to key
employees and directors of the Corporation and its subsidiary. The options
granted under this Plan are intended to be either incentive stock options or
non-qualified options. This Plan also authorizes the grant of restricted stock
awards.
Options have been granted to purchase common stock principally at the
fair market value of the stock at the date of grant. Options are exercisable
starting one year after the date of grant and generally expire ten years from
the date of grant. Upon the exercise of options, proceeds received in excess of
the average treasury cost of the shares are credited to additional paid in
capital.
Changes in options outstanding during the past three years were as
follows:
EXERCISE PRICE RANGE
Stock Option Plan Shares Per Share
- --------------------------------------------------------------------------------
Outstanding, December 31, 1997,
(153,411 shares exercisable) 178,876 $10.95 to $13.12
Granted during 1998 --
Exercised during 1998 (18,600) $10.95 to $13.12
Expired or canceled during 1998 --
- --------------------------------------------------------------------------------
Outstanding, December 31, 1998,
(150,125 shares exercisable) 160,276 $10.95 to $13.12
Granted during 1999 42,970 $ 15.50
Exercised during 1999 (11,700) $10.98 to $11.80
Expired or canceled during 1999 --
- --------------------------------------------------------------------------------
Outstanding, December 31, 1999,
(143,370 shares exercisable) 191,548 $10.95 to $15.50
Granted during 2000 --
Exercised during 2000 (31,719) $ 11.80
Expired or canceled during 2000 (4,195) $ 15.50
- --------------------------------------------------------------------------------
Outstanding, December 31, 2000
(126,543 shares exercisable) 155,634 $10.98 to $15.50
================================================================================
46
Fair Value of Stock Options Grants
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model.
The following weighted-average assumptions were used for the grants of
options in 1999. There were no options issued in 2000 or 1998.
o Dividend yield of 4.00%
o Expected volatility of 22.0%
o Risk-free interest rates based upon equivalent-term Treasury Rates
o Expected options lives were contractual lives at the date of grant
The following table summarizes the fair value of the stock options
granted during the last three years ended December 31, 2000, 1999 and 1998.
There were no grants of stock options in 2000, 42,970 in 1999 and no grants in
1998.
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED OPTIONS WEIGHTED
GRANTED AVERAGE GRANTED AVERAGE GRANTED AVERAGE
FAIR VALUE FAIR VALUE FAIR VALUE
- -------------------------------------------------------------------------------------------------------------
Incentive stock options -- $ 0.00 -- $ 0.00 -- $ 0.00
Non-qualifying stock options -- $ 0.00 42,970 $ 2.97 -- $ 0.00
Director's plan -- $ 0.00 -- $ 0.00 -- $ 0.00
- -------------------------------------------------------------------------------------------------------------
Total -- $ 0.00 42,970 $ 2.97 -- $ 0.00
=============================================================================================================
Under APB Opinion 25, compensation cost for the stock options is not
recognized because the exercise price of the stock options equals the market
price of the underlying stock on the date of the grant. Had compensation expense
been recorded for stock options granted as determined under SFAS 123, net income
would have been reduced by approximately $18,650 in 2000, $30,450 in 1999 and
$19,000 in 1998, which would have changed the Corporation's basic and diluted
earnings per share, by $0.01 in 2000, 1999 and 1998.
RESTRICTED STOCK
- ----------------
Restricted Stock may be awarded to key employees providing for the
immediate award of the Corporation's common stock subject to certain vesting and
other restrictions. During 1999, 4,548 shares were awarded and issued from
treasury shares to a trust. The fair value of the shares at the date of the
award are amortized into salary expense over the vesting period. There were no
awards of restricted stock in 2000 or 1998. The amount of compensation costs
related to restricted stock awards included in salary expense was approximately
$15,000 in 2000 and $7,000 in 1999. As of December 31, 2000, 909.6 shares of the
restricted stock awards were vested.
47
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 9: INCOME TAXES
The current and deferred amounts of income tax expense for the years ended
December 31, 2000, 1999 and 1998 respectively, are as follows:
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
CURRENT:
Federal $ 2,620 $ 2,526 $ 1,871
State 96 94 162
- --------------------------------------------------------------------------------
2,716 2,620 2,033
================================================================================
DEFERRED:
Federal (247) (263) 108
State (79) (4) --
(326) (267) 108
- --------------------------------------------------------------------------------
Income tax expense $ 2,390 $ 2,353 $ 2,141
================================================================================
Reconciliation between the amount of reported income tax expense and
the amount computed by applying the statutory Federal income tax rate is as
follows:
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------
Income before income tax expense $ 7,395 $ 6,982 $ 6,313
Federal statutory rate 34% 34% 34%
- --------------------------------------------------------------------------------
Compute "expected" Federal income tax expense 2,514 2,374 2,146
State tax net of Federal tax benefit 63 59 107
Decrease in valuation allowance (54) (4) --
Tax-exempt interest and dividends (270) (291) (223)
Other, net 137 215 111
- --------------------------------------------------------------------------------
Income tax expense $ 2,390 $ 2,353 $ 2,141
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
2000 and 1999 are presented below:
(DOLLARS IN THOUSANDS) 2000 1999
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses $ 433 $ 289
Pension expense 847 617
Organization cost 68 58
Unrealized losses on securities available-for-sale -- 1,248
- --------------------------------------------------------------------------------
Total gross deferred tax asset 1,348 2,212
Valuation allowance -- (54)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 1,348 $ 2,158
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciation $ 276 $ 280
Market discount accretion 128 97
Deferred fee expense-mortgages 295 206
Unrealized gains on securities available-for-sale 226 --
Other 15 19
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 940 602
- --------------------------------------------------------------------------------
Net deferred tax asset $ 408 $ 1,556
================================================================================
48
Based on the Corporation's historical and current pre-tax earnings and
the availability of net operating loss carrybacks on a Federal basis, management
believes it is more likely than not that the Corporation will realize the
benefit of the net deductible temporary differences existing at December 31,
2000 and 1999, respectively.
The valuation allowance is due to the state tax effect of the net
deductible temporary difference calculated on a separate company basis. The
valuation allowance for deferred tax assets as of December 31, 2000 was $0
compared to $54,000 in 1999.
NOTE 10: REGULATORY CAPITAL REQUIREMENTS
- ----------------------------------------
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 2000, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.0%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution.
Such actions could have a direct material effect on the institution's
financial statements. The regulations establish a framework for the
classification of financial institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. Generally, an institution is considered well
capitalized if it has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier
1 risk-based capital ratio of at least 6.0%; and a total risk-based capital
ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
As of December 31, 2000, management believes that the Bank meets all
capital adequacy requirements to which it is subject and is a well-capitalized
institution under the prompt corrective action regulations.
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 2000 and 1999, compared to the FDIC minimum capital
adequacy requirements and the FDIC requirements for classification as a
well-capitalized institution:
FDIC REQUIREMENTS
- ------------------------------------------------------------------------------------------------
UNION CENTER NATIONAL MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUALS ADEQUACY AS WELL CAPITALIZED
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Leverage (Tier 1) capital $36,298 6.56% $22,229 4.00% $27,665 5.00%
- ------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1 36,298 12.84% 11,309 4.00% 16,963 6.00%
Total 37,953 13.42% 22,617 8.00% 28,271 10.00%
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------
Leverage (Tier 1) capital $35,496 6.90% $20,574 4.00% $25,717 5.00%
- ------------------------------------------------------------------------------------------------
Risk-based capital:
- ------------------------------------------------------------------------------------------------
Tier 1 35,496 14.61% 9,721 4.00% 14,582 6.00%
- ------------------------------------------------------------------------------------------------
Total 36,919 15.19% 19,442 8.00% 24,303 10.00%
================================================================================================
49
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Corporation's financial
instruments:
The carrying amounts for cash and cash-equivalents approximate fair
value because they mature in 90 days or less and do not present unanticipated
credit concerns. The fair value of investment securities is estimated based on
bid quotations received from securities dealers. Stock of the Federal Home Loan
Bank of New York is carried at cost.
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial, real
estate-mortgage, and installment loans.
The fair value of performing loans, except residential mortgages, is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the 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.
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, 2000 and 1999. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for deposits of similar
remaining maturities.
The fair value estimates of commitments to extend credit and standby
letters of credit are estimated at the fee charged by the Bank for similar
transactions. This amount is deemed immaterial.
Short-term borrowings that mature within six months have fair values
equal to their carrying value.
The fair value of FHLB advances is based on the discounted value of
estimated cash flows. The discount rate is estimated using the rates currently
offered for similar advances. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature, involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
liabilities, goodwill, and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered.
50
The estimated fair value of the Corporation's financial instruments is
as follows:
DECEMBER 31,
- -------------------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 22,274 $ 22,274 $ 18,675 $ 18,675
Investments Available-for-Sale 156,513 156,513 120,490 120,490
Investments Held to Maturity 173,754 173,224 183,450 176,542
Net loans 197,294 194,362 167,666 165,371
FINANCIAL LIABILITIES:
- -------------------------------------------------------------------------------------------
Non-interest bearing deposits 93,231 93,231 94,829 94,829
Interest-bearing deposits 332,065 332,043 294,426 294,403
Federal funds purchased, securities sold under
agreement to repurchase and FHLB advances $101,262 $101,262 $ 80,752 $ 80,731
===========================================================================================
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS
- -----------------------------------------------------
Center Bancorp, Inc. operates its wholly owned subsidiary, Union Center
National Bank. The earnings of this subsidiary are recognized by the Corporation
using the equity method of accounting. Accordingly, earnings are recorded as
increases in the Corporation's investment in the subsidiary and dividends paid
reduce the investment in the subsidiary. The ability of the Corporation to pay
dividends will largely depend upon the dividends paid to it by the Bank.
Dividends payable by the Bank to the Corporation are restricted under
supervisory regulations (see Note 13). Condensed financial statements of the
Parent Corporation only are as follows:
CONDENSED STATEMENTS OF CONDITION
AT DECEMBER 31,
- -------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999
- -------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 128 $ 144
Investment in subsidiary 39,056 36,360
Other assets 566 578
- -------------------------------------------------------------------------------------------
Total assets $39,750 $37,082
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 568 $ 569
Stockholders' equity 39,182 36,513
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $39,750 $37,082
===========================================================================================
CONDENSED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Income
Dividend income from subsidiary $ 4,658 $ 1,663 $ 1,720
Management fees 32 59 50
- -------------------------------------------------------------------------------------------
Total Income 4,690 1,722 1,770
Expenses 164 173 159
- -------------------------------------------------------------------------------------------
Net income before equity in earnings of subsidiary 4,526 1,549 1,611
Undistributed equity in earnings of subsidiary 479 3,080 2,561
- -------------------------------------------------------------------------------------------
Net Income $ 5,005 $ 4,629 $ 4,172
===========================================================================================
51
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 12: PARENT CORPORATION ONLY FINANCIAL STATEMENTS continued
CONDENSED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 5,005 $ 4,629 $ 4,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed equity in earnings of subsidiary (479) (3,080) (2,561)
Other, net 13 (1) 31
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,539 1,548 1,642
==============================================================================================================
INVESTING ACTIVITIES:
Net cash used in investing activities -- -- --
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends (2,265) (2,213) (2,023)
Proceeds from exercise of stock options 388 138 219
Proceeds from issuance of common stock 255 318 320
Purchase of Treasury Stock (2,931) -- --
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,553) (1,757) (1,484)
- --------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash (16) (209) 158
Cash and cash equivalents at beginning of year 144 353 195
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 128 $ 144 $ 353
==============================================================================================================
NOTE 13: DIVIDENDS AND OTHER RESTRICTIONS
- -----------------------------------------
Certain restrictions, including capital requirements, exist on the
availability of undistributed net profits of the subsidiary bank for the future
payment of dividends to the Corporation. A dividend may not be paid if it would
impair the 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. At December 31, 2000, $10.8
million was available for the payment of dividends.
NOTE 14: COMMITMENTS, CONTINGENCIES
AND CONCENTRATIONS OF CREDIT RISK
- ---------------------------------
In the normal course of business, the Corporation has outstanding
commitments and contingent liabilities such as commitments to extend credit,
including loan commitments of $28,285,000, ($26,029,000 subject to variable rate
indices and $2,256,000 fixed rate commitments) as of December 31, 2000. Standby
letters of credit, which are not reflected in the accompanying consolidated
financial statements, totaled $12,125,000 and $7,242,000 as of December 31, 2000
and 1999, respectively. Commitments to extend credit and standby letters of
credit generally do not exceed one year. These financial instruments involve, to
varying degrees, elements of credit risk in excess of the amounts recognized in
the consolidated financial statements. The commitment or contract amount of
these financial instruments is an indicator of the Corporation's level of
52
involvement in each type of instrument as well as the exposure to credit loss in
the event of non-performance by the other party to the financial instrument. The
Corporation controls credit risk of these financial instruments through credit
approvals, limits and monitoring procedures. To minimize potential credit risk
the Corporation generally requires collateral and other credit-related terms and
conditions from the customer. In the opinion of management, the financial
condition of the Corporation will not be materially affected by the final
outcome of these commitments and contingent liabilities.
A substantial portion of the Bank's loans are one to four family
residential first mortgage loans secured by real estate located in New Jersey.
Accordingly, the collectability of a substantial portion of the loan portfolio
of the Bank is susceptible to changes in the real estate market.
On December 11, 2000, the Corporation's subsidiary Union Center
National Bank received approval from the Office of the Comptroller of the
Currency for a new branch to be located at 214 South Street, Morristown, New
Jersey. On October 26, 2000, the Planning Board of the Town of Morristown
approved the Corporations' plans for construction of the new branch. Through
December 31, 2000, the Corporation has recorded approximately $755,000 for land
and $82,182 in construction in progress expenditures related to the new branch.
Non-interest expenses include rentals for premises and equipment of
$357,645 in 2000, $325,765 in 1999 and $264,825 in 1998. At December 31, 2000,
Center Bancorp, Inc. and its subsidiary were obligated under a number of
non-cancelable leases for premises and equipment, many of which provide for
increased rentals based upon increases in real estate taxes and the cost of
living index. These leases, most of which have renewal provisions, are
principally operating leases. Minimum rentals under the terms of these leases
for the years 2000 through 2004 are $366,478, $374,407, $390,784, $411,263 and
$432,891 respectively. Minimum rentals due 2005 and after are $658,906.
The Corporation is subject to claims and lawsuits that arise in the
ordinary course of business. Based upon the information currently available and
advice received from legal counsel representing the Corporation in connection
with such claims, it is the opinion of management that the disposition or
ultimate determination of such claims will not have a material adverse impact on
the consolidated financial position or results of operations, or liquidity of
the Corporation.
53
[CENTER BANCORP, INC. LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 15: QUARTERLY FINANCIAL INFORMATION
CENTER BANCORP, INC., (unaudited)
- ---------------------------------
2000
- -------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -------------------------------------------------------------------------------------------------------
Total interest income $ 9,430 $ 9,085 $ 8,866 $ 8,274
Total interest expense 4,442 4,257 3,957 3,526
Net interest income 4,988 4,828 4,909 4,748
Provision for loan losses 110 51 151 51
Other income 414 450 485 285
Other expense 3,279 3,431 3,419 3,225
Income before income taxes 2,013 1,796 1,824 1,757
Net income 1,335 1,243 1,231 1,196
Earnings per share:
Basic $ 0.36 $ 0.33 $ 0.32 $ 0.31
Diluted $ 0.36 $ 0.33 $ 0.32 $ 0.31
Weighted average common shares outstanding:
Basic 3,724,303 3,747,901 3,824,126 3,801,598
Diluted 3,744,721 3,765,600 3,846,603 3,820,368
=======================================================================================================
1999
- -------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -------------------------------------------------------------------------------------------------------
Total interest income $ 8,453 $ 8,171 $ 7,928 $ 7,540
Total interest expense 3,479 3,283 3,090 2,949
Net interest income 4,974 4,888 4,838 4,591
Provision for loan losses 36 36 18 18
Other income 289 286 270 246
Other expense 3,500 3,347 3,312 3,132
Income before income taxes 1,727 1,791 1,778 1,687
Net income 1,166 1,162 1,170 1,131
Earnings per share:
Basic $ 0.31 $ 0.31 $ 0.31 $ 0.30
Diluted $ 0.31 $ 0.30 $ 0.31 $ 0.30
Weighted average common shares outstanding:
Basic 3,787,679 3,782,645 3,774,570 3,760,772
Diluted 3,810,573 3,810,573 3,798,112 3,787,237
=======================================================================================================
54
INDEPENDENT AUDITOR'S REPORT
- ----------------------------
[KPMG LOGO]
The Board of Directors and Stockholders Center Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of
Center Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Center
Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 4 to the consolidated financial statements, on
January 1, 2000, the Corporation adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivatives and Similar Financial Instruments
and for Hedging Activities" and No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities."
KPMG LLP
Short Hills, New Jersey
February 1, 2001
55