ANNUAL REPORT 2001
Portraits in
Community
Banking
[PHOTO]
[LOGO] Center Bancorp, Inc. Union Center
And wholly owned subsidiaries UNION CENTER NATIONAL BANK
Member F.D.I.C.
Since 1923, we have been a source of strength and stability in an ever-changing
marketplace and world. We thank our customers and friends who have chosen us as
their financial institution.
On the following pages, we are pleased to present a showcase of customers who
are representative of the thousands of local, small and medium size companies
that Union Center National Bank is proud to serve.
Financial Highlights ............................................... 1
To Our Shareholders, Customers and Friends ......................... 2
Customer Showcase .................................................. 6
Management ......................................................... 14
Summary of Selected Statistical Information and Financial Data ..... 19
Management's Discussion and Analysis ............................... 20
Consolidated Statements of Condition ............................... 40
Consolidated Statements of Income .................................. 41
Consolidated Statements of Changes in Stockholders' Equity ......... 42
Consolidated Statements of Cash Flows .............................. 43
Notes to Consolidated Financial Statements ......................... 44
Independent Auditors' Report ....................................... 63
Stockholders' Information .......................................... 64
Locations............................................... inside back cover
[LOGO] Union Center
UNION CENTER NATIONAL BANK
LOCATIONS
UNION
Main Office
2455 Morris Avenue
Union, NJ 07083
(908) 688-9500
Lobby, Drive-Up and ATM
Center Office
2003 Morris Avenue
Union, NJ 07083
Lobby and ATM
Stowe Street
2022 Stowe Street
Union, NJ 07083
Drive-Up, Walk-Up and ATM
Five Points
356 Chestnut Street
Union, NJ 07083
Lobby, Drive-Up and ATM
Career Center
Union High School
North Third Street
Union, NJ 07083
Lobby
Auto Banking Center
Bonnel Court
Union, NJ 07083
Drive-Up, Walk-Up and ATM
Union Hospital
1000 Galloping Hill Road
Union, NJ 07083
ATM
BERKELEY HEIGHTS
Berkeley Heights Banking Center
512 Springfield Avenue
Berkeley Heights, NJ 07922
Lobby, Drive-Up and ATM
MADISON
Madison Banking Center
300 Main Street
Madison, NJ 07940
Lobby, Drive-Up and ATM
MORRISTOWN
Morristown Banking Center
84 South Street
Morristown, NJ 07960
Lobby and ATM
Coming Spring 2002
Town Hall Banking Center
214 South Street
Morristown, NJ 07960
Lobby, Drive-Up and ATM
SPRINGFIELD
Springfield Banking Center
783 Mountain Avenue
Springfield, NJ 07081
Lobby, Drive-Up and ATM
SUMMIT
Summit Banking Center
392 Springfield Avenue
Summit, NJ 07901
Lobby and ATM
VAUXHALL/MILLBURN
Millburn Mall Banking Center
2933 Vauxhall Road
Vauxhall, NJ 07088
Lobby and ATM
[LOGO] Center Bancorp, Inc.
2455 Morris Avenue, Union, NJ 07083
Financial Highlights
FOR THE YEARS ENDED DECEMBER 31,
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PERCENT
(DOLLARS IN THOUSANDS EXCPET PER SHARE DATA) 2001 2000 CHANGE
- -------------------------------------------------------------------------------------------------------------
EARNINGS
Net Interest Income $ 22,362 $ 19,472 14.84%
Provision for Loan Losses 656 363 80.72%
Other Income 2,307 1,711 34.83%
Gain (Loss) on Securities Sold 181 (78) (332.05%)
Other Expenses 15,216 13,347 14.00%
Net Income 6,011 5,005 20.10%
Cash Dividends Declared $ 2,338 $ 2,265 3.22%
- -------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Income
Basic $ 1.53 $ 1.26 8.13%
Diluted 1.51 1.26 8.20%
Cash Dividends Paid 0.59 0.60 3.45%
Book Value 11.17 10.02 11.47%
Tangible Book Value $ 10.65 $ 9.40 13.30%
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AT YEAR END:
Market Value Bid Ask Bid Ask
Per common share $18.95 $19.00 $20.00 $21.25
- -------------------------------------------------------------------------------------------------------------
AT YEAR END:
Investment Securities $ 417,274 $ 330,267 26.34%
Loans 211,236 198,949 6.18%
Assets 689,603 569,553 21.08%
Deposits 497,833 425,296 17.06%
FHLB advances 60,000 50,000 20.00%
Federal funds purchased and securities sold
under agreements to repurchase 72,296 51,262 41.03%
Stockholder's Equity $ 44,296 $ 39,182 13.05%
Shares Outstanding 3,964,652 3,911,805 1.35%
- -------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average assets 0.99% 0.94%
- -------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 14.08% 13.43%
Return on tangible average stockholders' equity 14.86% 14.43%
- -------------------------------------------------------------------------------------------------------------
Cash dividend declared as a
percent of Net Income 38.90% 45.25%
- -------------------------------------------------------------------------------------------------------------
Average stockholders' equity as a percent of average
total assets 7.02% 6.97%
Tangible Average stockholders' equity as a
percent of average total assets 6.70% 6.52%
- -------------------------------------------------------------------------------------------------------------
Stockholders' equity as a percent of total assets 6.42% 6.88%
Tangible Stockholders' equity as a percent of total assets 6.14% 6.48%
- -------------------------------------------------------------------------------------------------------------
Average Risk Based Tier I Capital Ratio 12.37% 13.24%
Average Risk Based Tier I and Tier II Capital 13.17% 13.79%
Tier I Leverage Ratio 7.77% 6.60%
=============================================================================================================
[LOGO] Center Bancorp, Inc.
[PHOTO]
John J. Davis
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Alexander A. Bol
CHAIRMAN OF
THE BOARD
2
TO SHAREHOLDERS, CUSTOMERS AND FRIENDS
Our country has changed drastically since our last annual report to you. Along
with the rest of the world, we were profoundly shocked and deeply saddened by
the terrorist attacks that took place in the United States on September 11,
2001. Our thoughts and deepest sympathies are with those who were injured and
with the families, colleagues, and friends who lost loved ones in this senseless
tragedy.
The financial impact of the terrorist events underscored the need for
strong, stable financial institutions such as Center Bancorp, Inc. Our
customers' confidence in Center Bancorp's financial strength and stability is
something we will never take lightly. As evidence, we cite our ongoing
commitment to focus on the banking business fundamentals of safety, soundness,
consistent earnings quality, and superior customer service.
In this year's Annual Report, we feature just a few of the many
customers of Union Center National Bank, the principal banking subsidiary of
Center Bancorp, Inc. These customers have come to rely on the bank for their
financial needs and the Bank is proud to serve them.
FINANCIAL HIGHLIGHTS
Despite the economic turmoil and the distractions caused by recent events, I'm
pleased to share with you the highlights of another year of record performance
unequaled in our 78-year history.
Our net income for 2001 amounted to $6,011,000, which represented a
20.10% increase over earnings of $5,005,000 for 2000. Earnings of $1.51 per
fully diluted share compared favorably to earnings of $1.26 per fully diluted
share in 2000. Widening net interest margins and double-digit gains in
noninterest fee revenue growth served as the key performance drivers.
At year-end 2001, our assets totaled $689.6 million, an increase of
21.1% over the $569.6 million reported at year-end 2000. Strong interest-earning
asset growth in both the loan and the investment securities portfolios offset
the effects of net interest margin pressure caused by falling interest rates.
Deposit growth was strong for the year. At year-end, total deposits for
the Corporation stood at $497.8 million, up 17.06% from 2000. Total core
deposits were $275,084, representing 55% of total deposits. Non-interest bearing
core deposits, a low-cost source of funding, remained a key funding source for
the Corporation. At December 31, 2001, these deposits amounted to $103.5 million
or 16.4% of total funding sources and 20.8% of total deposits.
Net Income
(In millions of dollars)
[BAR GRAPH]
3
[LOGO]
[PHOTO]
Renovations to our Stowe Street
Drive-In/Walk-Up Branch were
completed in November 2001.
Non-interest revenue generation continued to improve and continues to
increase as a percentage of total revenue. For 2001, total fee revenue
(exclusive of gains in securities sold of $181,000) increased 34.8% or $596,000
when compared to 2001.
Loans increased $12.3 million, up 6.17% over the previous year. The increase in
loan growth continues to be driven by strong demand for commercial and
residential mortgage loans, led primarily by the Corporation's expansion into
desirable markets such as Summit, Madison, and Morristown. The Corporation's
investment securities portfolio increased $87.0 million, up 26.3% over the prior
year, a result that reflected the Corporation's leverage strategies.
The continuing uncertainty in the economy and the world events of 2001
called for an increased focus on credit quality. While asset quality remained
sound, $656,000 was added to the provision for loan losses in order to better
align loan loss reserves with loan portfolio growth.
On December 18, 2001, the Corporation completed an issuance of $10.0
million in floating rate Capital Trust Preferred Securities, through a pooled
offering with First Tennessee Capital Markets. For regulatory capital purposes,
the securities are included as a component of Tier I leverage capital. The Tier
I leverage capital ratio subsequently increased to 7.78 percent of total assets
at December 31, 2001.
In summary, I believe our financial performance in 2001 continued to
reflect the value of the franchise as well as its potential.
CREATING CUSTOMER VALUE
In addition to providing superior customer service, our community banking
strategy focuses on offering a full range of banking products and services,
localized decision making, and leading edge technology that, by automating
routine functions, allows us to focus on adding value where it matters most to
customers. In 2001, Union Center National Bank introduced innovative deposit and
loan products and broadened its service delivery system, with a focus on
providing the Corporation with new avenues for revenue growth.
In terms of product development and service enhancements, we strive to
be responsive to our customers needs and preferences. For customers who are more
comfortable with "bricks and mortar" traditional branch banking, we continue to
invest in core banking products such as Super Max, a high-yield Money Market
savings account. For those retail and business depositors who value convenience
and round-the-clock access, we have responded with innovations such as Internet
banking and bill paying. Because we remain focused on the customer, we are
equally comfortable whether providing service powered by people or convenience
driven by technology.
Total Asset Growth
(In millions of dollars)
[BAR GRAPH]
4
In 2001, the Bank remained committed to attracting and retaining small
business customers, relying on our lending team to aggressively compete for this
business and to make well-priced, solid loans.
Last year, we continued to reap the benefits of our geographic
expansion into new markets. Our Summit, Madison, and Morristown offices
continued to grow profitably. This spring, we will open an additional South
Street Morristown office, a 2,800 square-foot free-standing banking facility
with a two-lane drive up, both a walk-up and a drive-up ATM, and abundant
on-site parking. The office complements our pedestrian-friendly location just
east of the Morristown Green. We believe that this additional location will
enhance customer convenience and enable us to continue to grow market share in
this vibrant community.
In terms of facility improvements, we have completely renovated our
Stowe St. Drive-In/Walk-Up branch and the grounds surrounding it. This
enhancement allows us to better service our customers in a modern and convenient
setting.
OUTLOOK FOR CONTINUED GROWTH AND STABILITY
Center Bancorp, Inc. ended 2001 with strong fundamentals, profitable growth, and
a sophisticated product line. We entered 2002 with a stronger franchise and a
renewed commitment to understand and exceed our customers needs and
expectations. Looking ahead, we will adhere to our established principles of
high credit quality, continued low cost deposit growth, increased fee and
service income, effective expense control, and excellence in customer service.
As a results-oriented Corporation, we will continue to make significant
investments in our product offerings, in our technology, in our facilities, in
our communities and in our people.
In closing, we thank our shareholders for their support, our directors
for their guidance, our employees for their efforts, and our customers for their
loyalty. We pledge to continue to earn the confidence you have placed in us.
/s/ JOHN J. DAVIS /s/ ALEXANDER A. BOL
John J. Davis Alexander A. Bol
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
Total Deposits
(In millions of dollars)
[BAR GRAPH]
5
an investment in great taste...
[PHOTO]
Ristorante Da Benito, located in Union, New Jersey offers a first class dining
experience of Italian and European cuisine. Customers enjoy impeccable service
in a sophisticated, yet comfortable atmosphere.
Union Center National Bank has been with Benito's every step of the way - from
its grand opening in 1985, during renovations and expansions, to its recent
honors from New Jersey Monthly Magazine and The New York Times.
"Union Center National Bank provides the same attention to detail and service
that my customers have come to expect from Benito's Ristorante."
Benito Hasenjaj, Proprietor
RISTORANTE DA BENITO, UNION
6
[LOGO]
Union Center
UNION CENTER NATIONAL BANK
keeping the Y hopping...
Founded in 1873, The Madison Area YMCA is one of the leading YMCA's in New
Jersey and in the United States. Currently undergoing a major expansion project,
the Madison Area YMCA provides residents of Southeast Morris County a community
resource for recreation, fitness and enrichment.
"To us, Union Center National Bank embodies the core values of the YMCA:
respect, responsibility, caring and honesty. UCNB is a trusted financial partner
that we can depend on to help us meet the needs of our community."
Barry Kroll, President
MADISON AREA YMCA, MADISON
[PHOTO]
7
whatever the doctor orders...
The New York Shipping Association/International Longshoreman Association has
been serving the pharmaceutical needs of it's members and families from Maine to
Texas for over 50 years. With 14 pharmacists on-site at their new Union, New
Jersey location, the Association fulfills over 1,800 prescriptions daily.
"Throughout our expansion to Union we quickly came to discover the true meaning
of a community bank. Through it all, we always knew that our personal banker was
just a phone call away. It's this kind of service that sets them apart from
their competition."
Kamalesh P Dholakia, Administrator
THE NEW YORK SHIPPING ASSOCIATION/INTERNATIONAL LONGSHOREMAN
ASSOCIATION, UNION
[PHOTO]
8
[LOGO]
Union Center
UNION CENTER NATIONAL BANK
the doctors are in...
[PHOTO]
Union Hospital, an affiliate of The Saint Barnabas Healthcare Systems, is no
stranger to helping people. For more than 55 years, they have provided high
quality healthcare to the Union County area. With more than 400 physicians,
1,200 employees and 300 volunteers, Union Hospital cares for more than 65,000
patients annually.
"From providing the latest in financial products and services to meeting our
expanding needs, we can always count on the Bank with a Heart as a leading
supporter of Union Hospital and it's Foundation."
Left to right James Masterson, V.P. Community & Government Relations/President,
Union Hospital Foundation; Patricia McKeon-Hoffman, V.P. Ancillary & Supports;
Sal Rullis, Project Manager, Center for Surgery at Union Hospital
UNION HOSPITAL, UNION
9
something to eat, something to drink, served with a smile...
[PHOTO]
When Union Center National Bank first expanded to Morristown in 1998, a longtime
friend was waiting at our door. Just around the corner from the UCNB Morristown
Banking Center, The Dublin Pub's classic Irish menu and historic decor provides
patrons with a little taste of Ireland.
"Jack Davis, now President and CEO of Union Center National Bank, was there for
me many years ago when the Dublin Pub was merely a dream in need of financial
backing. Through the years, UCNB has continued to offer the experience and sound
advice that has helped make us the success we are today."
Jim Mongey, Proprietor (right) Pat Mongey, Brother (left)
THE DUBLIN PUB, MORRISTOWN
10
[LOGO]
Union Center
UNION CENTER NATIONAL BANK
keeping the fleet on the road...
Air Brake & Equipment and International Trucks of Central Jersey has grown to be
one of the largest truck dealers, truck parts and service suppliers in the
tri-state area. Family owned and operated for twenty-eight years, the
Appolonia's are proud of the choice they made when they turned to Union Center
National Bank.
"Union Center National Bank's ability to tailor banking packages to our specific
needs has helped us through every phase of our growth. Without Union Center
National Bank's help and guidance the extent of our growth would not have been
possible."
Anthony, Mary and Matthew Appolonia
INTERNATIONAL TRUCKS OF CENTRAL JERSEY, HOWELL
AIR BRAKE & EQUIPMENT, HILLSIDE
[PHOTO]
11
keeping New Jersey in bloom...
[PHOTO]
Coviello Brothers is a full service nursery and floral center located in
Madison, New Jersey, serving all of New Jersey and the United States. Family
owned and operated, Coviello's takes pride in the personal, hands-on service
they have been providing their customers since 1973.
"In a world of impersonal service, it is comforting to work with a bank that
employs our same family-style approach with their customers - they truly
understand the value of the human touch."
Peter and Carmine Coviello, Owners
COVIELLO BROTHERS
12
[LOGO]
Union Center
UNION CENTER NATIONAL BANK
paving the way...
Hillcrest Paving and Excavating, Inc. of Maplewood New Jersey instills the image
of strength and stability. Hillcrest has been incorporated in the State of New
Jersey since 1979 and specializes in commercial, industrial & municipal asphalt
paving, excavating, utilities, and recreational facilities. They are committed
to the same customer satisfaction that they receive from UCNB.
"Union Center National Bank has withstood the test of time. Knowing that they
have been helping businesses like ours since 1923 gives us the confidence we
desire in our financial partner."
Gerald J. Giordano, President
HILLCREST PAVING AND EXCAVATING, MAPLEWOOD
13
[LOGO] Center Bancorp, Inc.
[PHOTO]
Thanks Chuck....
Charles P. Woodward retired from the Board of Directors on April 17, 2001. The
Board of Directors immediately elected him an Honorary Director.
Mr. Woodward was appointed to the Board in 1970. He served as Chairman
of the Board from 1987 until his retirement.
The Shareholders, Board of Directors, Officers and Staff extend to Mr.
Woodward our sincere thanks and best wishes for health and happiness in his
retirement.
14
[LOGO] Center Bancorp, Inc.
BOARD OF DIRECTORS OF CENTER BANCORP, INC.
[PHOTO]
Pictured seated left to right are: James J. Kennedy, Hugo Barth, III, Brenda
Curtis, Robert L. Bischoff, Norman F. Schroeder.
Standing, left to right are:
Herbert Schiller, Paul Lomakin, Jr., John J. Davis, Alexander A. Bol, William A.
Thompson, Donald G. Kein.
Alexander A. Bol, A.I.A.
ARCHITECT
Hugo Barth, III
PARTNER, HAEBERLE & BARTH
Robert L. Bischoff
PRESIDENT, BEER IMPORT CO.
Brenda Curtis
EXEC. DIRECTOR, AMERICAN CANCER SOCIETY
John J. Davis
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Donald G. Kein
KEIN, POLLATSCHEK AND GREENSTEIN, ATTORNEYS
James J. Kennedy
MANAGING PARTNER,
KVI ASSET MANAGEMENT, LLC
Paul Lomakin, Jr.
PRESIDENT, WINTHROP DEVELOPMENT CO.
Herbert Schiller
PRESIDENT, FOREMOST MANUFACTURING CO.
Norman F. Schroeder
PRESIDENT, NFS ASSOCIATES, INC.
William A. Thompson
VICE PRESIDENT, THOMPSON & CO.
HONORARY DIRECTORS
Wallace J. Butler
John A. Deitrich
Robert C. Miller
Stanley R. Sommer
Rudi O. Wadle, D.O.
Charles P. Woodward
15
[LOGO] Center Bancorp, Inc.
OFFICERS OF CENTER BANCORP, INC.
[PHOTO]
Pictured above, seated left to right are: Donald Bennetti, John F. McGowan and
William E. Arnold. Standing, left to right are: Lori A. Wunder, Mark S. Cardone,
John J. Davis, Anthony C. Weagley and Julie D'Aloia.
John J. Davis
PRESIDENT AND CHIEF EXECUTIVE OFFICER
William E. Arnold
VICE PRESIDENT
Donald Bennetti
VICE PRESIDENT
Mark S. Cardone
VICE PRESIDENT
Julie D'Aloia
VICE PRESIDENT AND SECRETARY
John F. McGowan
VICE PRESIDENT
Anthony C. Weagley
VICE PRESIDENT AND TREASURER
Lori A. Wunder
VICE PRESIDENT
16
[LOGO]
Union Center
UNION CENTER NATIONAL BANK
WELCOMES...
[PHOTO] [PHOTO] [PHOTO]
Mark S. Cardone Richard J. Nowel Georgianna Goldin
SENIOR VICE PRESIDENT VICE PRESIDENT ASSISTANT VICE PRESIDENT
[PHOTO] [PHOTO] [PHOTO]
Samuel D. Lombardi Willard Thomas Dennis M. Grote
ASSISTANT VICE PRESIDENT ASSISTANT VICE PRESIDENT ASSISTANT CASHIER
CONGRATULATES...
[PHOTO] [PHOTO] [PHOTO]
Mark P. Balsam, Sr. Barry Keefe Angelo LaFerrera
VICE PRESIDENT ASSISTANT VICE PRESIDENT ASSISTANT CASHIER
17
[LOGO]
Union Center
UNION CENTER NATIONAL BANK
OFFICERS OF UNION CENTER NATIONAL BANK
John J. Davis Irene S. Greenman
PRESIDENT AND CHIEF EXECUTIVE OFFICER ASSISTANT VICE PRESIDENT
William E. Arnold Janet M. Imrich
SENIOR VICE PRESIDENT AND SENIOR LOAN OFFICER ASSISTANT VICE PRESIDENT
Donald Bennetti Damien D. Kane
SENIOR VICE PRESIDENT ASSISTANT VICE PRESIDENT
Mark S. Cardone Barry Keefe
SENIOR VICE PRESIDENT ASSISTANT VICE PRESIDENT
Julie D'Aloia Samuel D. Lombardi
SENIOR VICE PRESIDENT ASSISTANT VICE PRESIDENT
John F. McGowan Regina M. Nicholls
SENIOR VICE PRESIDENT ASSISTANT VICE PRESIDENT
Anthony C. Weagley Willard H. Thomas
SENIOR VICE PRESIDENT AND CASHIER ASSISTANT VICE PRESIDENT
Lori A. Wunder Saul A. Burgos
SENIOR VICE PRESIDENT ASSISTANT CASHIER
Mark P. Balsam, Sr. Debbie Damato
VICE PRESIDENT ASSISTANT CASHIER
Thomas E. Farley Michael F. Flesta
VICE PRESIDENT ASSISTANT CASHIER
Christopher M. Gorey Dennis M. Grote
VICE PRESIDENT ASSISTANT CASHIER
Barbara Liebman Angelo LaFerrera
VICE PRESIDENT ASSISTANT CASHIER
Richard J. Nowel Janet LaFerrera
VICE PRESIDENT ASSISTANT CASHIER
Francis Patryn Camille L. Moskowitz
VICE PRESIDENT AND COMPTROLLER ASSISTANT CASHIER
Anastasia Raissis Joan Mullen
VICE PRESIDENT ASSISTANT CASHIER
Jerry F. Smith Mark Procino
VICE PRESIDENT ASSISTANT CASHIER
Richard E. Vlerebome Susan Schweiker
VICE PRESIDENT AND AUDITOR ASSISTANT CASHIER
Salvatore DiRico Christine Spada
ASSISTANT VICE PRESIDENT ASSISTANT CASHIER
Edward B. Filipski
ASSISTANT VICE PRESIDENT ------------------------------
Louis J. Giacona GENERAL COUNSEL
ASSISTANT VICE PRESIDENT Donald G. Kein, Esq.
Georgianna Goldin
ASSISTANT VICE PRESIDENT
18
[LOGO] Center Bancorp, Inc.
SUMMARY OF SELECTED STATISTICAL INFORMATION
AND FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31,
SUMMARY OF INCOME --------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 38,369 $ 35,655 $ 32,092 $ 30,686 $ 30,706
Interest expense 16,007 16,183 12,801 13,573 14,487
Net interest income 22,362 19,472 19,291 17,113 16,219
Provision for loan losses 656 363 108 120 0
Net interest income after provision
for loan losses 21,706 19,109 19,183 16,993 16,219
Other income 2,488 1,633 1,089 971 1,111
Other expense 15,216 13,347 13,290 11,651 10,596
Income before income tax expense 8,978 7,395 6,982 6,313 6,734
Income tax expense 2,967 2,390 2,353 2,141 2,223
Net income $ 6,011 $ 5,005 $ 4,629 $ 4,172 $ 4,511
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA
Investments $ 417,274 $ 330,267 $ 303,940 $ 287,966 $ 298,298
Total loans 211,236 198,949 169,089 150,099 132,424
Total assets 689,603 569,553 509,624 470,134 473,112
Deposits 497,833 425,296 389,255 377,167 436,010
Stockholders' equity $ 44,296 $ 39,182 $ 36,513 $ 36,631 $ 33,422
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS
Cash dividends $ 2,338 $ 2,265 $ 2,213 $ 2,023 $ 1,863
Dividend payout ratio 38.9% 45.3% 47.8% 48.5% 41.3%
- ------------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE
Cash dividends $ 0.59 $ 0.57 $ 0.55 $ 0.50 $ 0.48
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $ 1.53 $ 1.26 $ 1.17 $ 1.06 $ 1.16
Diluted $ 1.51 $ 1.26 $ 1.16 $ 1.05 $ 1.15
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 3,939,792 3,963,206 3,964,638 3,928,552 3,896,344
Diluted 3,972,627 3,984,039 3,989,664 3,966,260 3,925,148
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING RATIOS
Return on average assets 0.99% 0.94% 0.92% 0.88% 0.94%
Return on tangible average equity 14.86% 14.43% 13.50% 12.93% 15.92%
- ------------------------------------------------------------------------------------------------------------------------------------
BOOK VALUE
Book value per common share $ 11.17 $ 10.02 $ 9.16 $ 9.29 $ 8.56
Tangible book value per common share $ 10.65 $ 9.40 $ 8.48 $ 8.51 $ 7.70
- ------------------------------------------------------------------------------------------------------------------------------------
NON-FINANCIAL INFORMATION
Common stockholders 543 581 603 606 609
Staff-Full time equivalent 172 156 162 153 140
- ------------------------------------------------------------------------------------------------------------------------------------
Footnote: All per share amounts have been adjusted retroactively for stock
splits and stock dividends during the periods presented.
19
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The following introduction to Management's Discussion and Analysis
highlights the principal factors that contributed to Center Bancorp's earnings
performance in 2001.
Center Bancorp, Inc., Reported Record Earnings for the year, 2001.
For the twelve months ended December 31, 2001, net income increased
20.1% to $6,011,000 or $1.51 per diluted share, as compared to $5,005,000 or
$1.26 per diluted share earned for the twelve months ended December 31, 2000. A
widening of the net interest margin and a double-digit percentage gain in
non-interest income growth were the primary drivers for the positive performance
of the Corporation.
Strong interest-earning asset growth in both the loan and the taxable
investment security portfolios offset the effects of interest rate pressure,
with loans increasing $12.3 million (up 6.17% percent over the prior year) and
the investment securities portfolio increasing $87.0 million (up 26.3% over the
prior year) at year end. The loan growth has been fueled by strong demand for
commercial and residential mortgage loans. A robust commercial real estate and
residential housing market prevailed throughout the year in New Jersey, despite
the national economic downturn.
The geographic expansion of the Corporation into desirable markets,
such as Summit, Madison and Morristown, New Jersey, is a key reason for the
increased loan demand. The increased size of the securities portfolio largely
reflects the Corporation's leverage strategies. This was reflected in the
addition of approximately $71.5 million in mortgage-backed securities to the
balance sheet during the fourth quarter in a recently initiated leverage
program.
While asset quality continues to remain high, during 2001, a total of
$656,000 was added to the provision for loan losses, to maintain adequate loan
loss reserves in relationship with loan portfolio growth and the change in the
loan mix to include a higher percent of commercial loans.
Non-interest bearing core deposits, a low-cost source of funding,
continue to remain a key funding source. At December 31, 2001, this source of
funding amounted to $103.5 million or 16.2% of total funding sources and 20.8%
of total deposits. For the twelve months, average-earning assets grew $66.6
million or 13.3% and interest-bearing liabilities increased on average $59.8
million.
Deposit growth was also strong for the year. The growth in average
deposits was reflected in core interest-bearing accounts, premium savings and
demand deposits. Our entry into Morris County several years ago with the opening
of our Madison and Morristown offices has improved our deposit position. At
December 31, 2001, total deposits for the Corporation were $497.8 million.
Net interest margins, while increasing for the twelve months ended
December 31, 2001, came under pressure from the continued decline in interest
rates. The Federal Reserve interest rate reductions dictated performance during
2001. Due to the lower interest rate environment, the margin expanded 2 basis
points to 4.00 percent for the twelve months ended December 31, 2001, as
compared with 3.98 percent for the comparable twelve-month period in 2000.
Successful non-interest revenue generation improved during the year,
and increased as a percentage of total revenue. The increase in revenue for 2001
was fueled by increased customer activity resulting in increased ATM and debit
card fees, coupled with increased other income attributable to an increase in
the cash surrender value of bank owned life insurance. For the year 2001,
non-interest income, exclusive of gains on securities sold of $181,000,
increased 34.8% or $596,000 as compared to the comparable twelve-month period in
2000. The Corporation intends to expand its ATM network in 2002, which should
increase ATM fees in 2002. The Corporation also perceives additional fee income
opportunities in aggressively marketing the Bank's PC Banking service,
Electronic Fund Transfer services, debit cards, lockbox and merchant processing
services.
Operating expenses for the year increased 14.0% with increased salary,
benefits, and bank premise and occupancy expense accounting for most of the
increase.
20
Total assets at December 31, 2001, were $689.6 million, an increase of
21.1% from assets of $569.6 million at December 31, 2000. Annualized returns on
average assets for the twelve months ended December 31, 2001 was .99% compared
to .94% for 2000.
Total stockholders' equity increased 13.05% over 2000 to $44.3 million,
and represented 6.42% of total assets at year-end. Book value per common share
was $11.17, as compared with $10.02 a year ago. Tangible book value per common
share increased to $10.65 from $9.40 a year ago. Annualized return on average
stockholders' equity for the twelve months ended December 31, 2001 was 14.1%
compared to 13.4% for 2000. On December 11, 2001, the Corporation completed an
issuance of $10.0 million in floating rate Capital Trust Preferred Securities,
through a pooled offering with First Tennessee Capital Markets. The securities
are included as a component of Tier I capital for regulatory capital purposes.
The Tier I Leverage capital ratio subsequently increased to 7.77 percent of
total assets at December 31, 2001.
A key element of the Corporation's consistent performance is its strong
capital base. The Corporation's risk-based capital ratios at December 31, 2001
were 12.37 percent for Tier I capital and 13.13 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 14.9
percent in 2001, compared with 14.4 percent for 2000 and 13.5 percent in 1999.
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.
RESULTS OF OPERATIONS
Net income and earnings per share (basic and diluted) increased by
20.10 percent, 21.43 percent and 19.84 percent, respectively, for the twelve
months ended December 31, 2001, compared to the twelve months ended December 31,
2000. This compared to an increase of 8.12 percent, 7.69 percent and 8.62
percent, respectively, for the twelve months ended December 31, 2000, as,
compared to the twelve months ended December 31, 1999. Net income for the twelve
months ended December 31, 2001 was $6,011,000 as compared to $5,005,000 earned
for the comparable twelve-month period of 2000 and $4,629,000 for the comparable
twelve-month period of 1999. All share and per share information for all periods
presented have been retroactively restated for stock splits and stock dividends
distributed to stockholders during the periods presented. The annualized return
on average assets was 0.99 percent for the twelve months ended December 31, 2001
as compared with 0.94 percent for the comparable period in 2000, and 0.92
percent for the comparable period in 1999, while the annualized return on
tangible average stockholders' equity was 14.86 percent, 14.43 percent and 13.50
percent, and respectively. Earnings performance for the twelve months ended
December 31, 2001, reflected a widening of net interest margins and a
double-digit percentage gain in non-interest revenue, offset in part by an
increase in noninterest expense and in the provisions for taxes and loan losses.
21
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
- --------------------------------------------------------------------------------
The most significant component of Center Bancorp's earnings is net
interest income, which is the difference between the interest earned in the
portfolio of earning-assets (principally loans and investments) 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 tax equivalent basis by
adjusting tax exempt income (primarily interest earned on various obligations of
state and political subdivisions) by the amount of income tax which would have
been paid had the assets been invested in taxable issues, and then in accordance
with the Corporation's consolidated financial statements. 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.
2001 2000
- ------------------------------------------------------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
FROM FROM
PRIOR PERCENT PRIOR PERCENT
DOLLARS IN THOUSANDS AMOUNT YEAR CHANGE AMOUNT YEAR CHANGE
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Investments $ 22,995 $ 1,714 8.05 $ 21,281 $ 1,398 7.03
Loans, including fees 15,301 894 6.21 14,407 2,209 18.11
Federal funds sold and securities
purchased under agreement to resell 331 (45) (11.97) 376 (76) (16.81)
- ------------------------------------------------------------------------------------------------------------
Total interest income 38,627 2,563 7.11 36,064 3,531 10.85
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Certificates $100,000 or more 1,465 (2,017) (57.93) 3,482 779 28.82
Deposits 9,216 454 5.18 8,762 1,452 19.86
Borrowings 5,326 1,387 35.21 3,939 1,151 41.28
- ------------------------------------------------------------------------------------------------------------
Total interest expense 16,007 (176) (1.09) 16,183 3,382 26.42
- ------------------------------------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis $ 22,620 $ 2,739 13.78 $ 19,881 $ 149 0.76
- ------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (258) 151 (36.92) (409) 32 (7.30)
- ------------------------------------------------------------------------------------------------------------
Net interest income $ 22,362 $ 2,890 14.84 $ 19,472 $ 181 0.94
============================================================================================================
1999
INCREASE
(DECREASE)
FROM
PRIOR PERCENT
DOLLARS IN THOUSANDS AMOUNT YEAR CHANGE
- --------------------------------------------------------------------------------
INTEREST INCOME:
Investments $ 19,883 $ 310 1.58
Loans, including fees 12,198 1,274 11.66
Federal funds sold and securities
purchased under agreement to resell 452 (98) (17.82)
- --------------------------------------------------------------------------------
Total interest income 32,533 1,486 4.79
- --------------------------------------------------------------------------------
INTEREST EXPENSE:
Certificates $100,000 or more 2,703 (1,598) (37.15)
Deposits 7,310 (540) (6.88)
Borrowings 2,788 1,366 96.06
Total interest expense 12,801 (772) (5.69)
Net interest income on a fully
tax-equivalent basis $ 19,732 $ 2,258 12.92
- --------------------------------------------------------------------------------
Tax-equivalent adjustment (441) (80) 22.16
- --------------------------------------------------------------------------------
Net interest income $ 19,291 $ 2,178 12.73
================================================================================
* 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.
22
NET INTEREST INCOME
Net interest income on a fully tax-equivalent basis for the twelve
months ended December 31, 2001 increased $2.7 million or 13.78 percent, from
$19.9 million for the comparable twelve-month period in 2000. The Corporation's
net interest margin increased two basis points to 4.00 percent from 3.98
percent.
The change in net interest income was primarily attributable to a 55
basis point decline in the average interest rates paid on total interest-bearing
liabilities, while there was a 40 basis point decrease in the average yield on
earning-assets from 7.22 percent in 2000 to 6.82 percent for the twelve months
ended December 31, 2001. The change in average yield on both interest-earning
assets and interest-bearing liabilities reflected the decline in interest rates
that prevailed throughout 2001. Since January 3, 2001, when the Federal Reserve
cut interest rates 50 basis points, the central bank has reduced interest rates
ten times on January 31, March 20, April 18, May 15, June 27, August 21,
September 17, October 2, November 6, and December 11, for a total reduction of
475 basis points in 2001.
For the twelve months ended December 31, 2001, interest earning-assets
increased by $66.6 million on average to $566.0 million, as compared with
$499.4 million for the twelve months ended December 31, 2000. The 2001
year-to-date changes in average interest-earning asset volumes were primarily
due to increased volumes of taxable investments and loans and were funded in
part with more costly interest-bearing liabilities, principally higher rate
deposit products such as Super Max, a high yield investment savings account,
coupled with increased volumes of other borrowings.
The factors underlying the year-to-year changes in net interest income
are reflected in the tables appearing on page 22 and on pages 24 and 39, each of
which have been presented on a tax-equivalent basis (assuming a 34 percent tax
rate). The table on page 39 (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 24 (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.
23
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
- --------------------------------------------------------------------------------
ANALYSIS OF VARIANCE IN NET INTEREST
INCOME DUE TO VOLUME AND RATES
2001/2000 2000/1999
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 $ 3,423 $(1,266) $ 2,157 $ 593 $ 901 $ 1,494
Non-Taxable (431) (12) (443) (134) 38 (96)
Federal funds sold and securities
purchased under agreement to resell 49 (94) (45) (169) 93 (76)
Loans, net of unearned discounts 1,515 (621) 894 1,984 225 2,209
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,556 (1,993) 2,563 2,274 1,257 3,531
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposits 94 (543) (449) 194 149 343
Savings deposits 803 (63) 740 365 884 1,249
Time deposits (881) (839) (1,720) (290) 863 573
Other interest-bearing deposits 51 (185) (134) (13) 79 66
Borrowings 2,016 (629) 1,387 646 505 1,151
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,083 (2,259) (176) 902 2,480 3,382
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET
INTEREST INCOME $ 2,473 $ 266 $ 2,739 $ 1,372 $(1,223) $ 149
====================================================================================================================================
Interest income on a fully tax-equivalent basis for the twelve-month
period ended December 31, 2001 increased by approximately $2.6 million or 7.11
percent, versus the comparable period ended December 31, 2000. The primary
factor contributing to the increase was the growth of earning assets, primarily
taxable investment securities and loans. The Corporation's loan portfolio
increased on average $20.1 million to $206.0 million from $185.8 million in the
same period of 2000. This growth was primarily driven by growth in commercial
mortgages, and residential mortgage loans. Primarily increased levels of high
yield savings deposits and short-term borrowings funded this growth. The loan
portfolio (traditionally the Corporation's highest yielding earning asset)
represented approximately 36.4 percent and 37.3 percent of the Corporation's
interest earning-assets (on average) for the twelve months ended December 31,
2001 and 2000, respectively.
Investments represented a significant change in the earning-asset mix
in 2001. Within the investment portfolio, the average volume in 2001 in taxable
securities increased by $51.8 million while the non-taxable portfolio decreased
by $6.2 million as compared to 2000.
Interest income (tax-equivalent) increased by $3.5 million from 1999 to
2000 primarily due to an increase in interest earning assets coupled with higher
average rates on earning assets.
Interest expense for the twelve months ended December 31, 2001
decreased as a result of a decline in interest rates despite an increase in the
volume of interest-bearing demand deposits, savings deposits and short-term
borrowings. For the twelve months ended December 31, 2001, interest expense
decreased $176,000 or 1.09 percent as compared with the comparable twelve-month
period in 2000. Interest-bearing liabilities increased on average $59.8 million,
primarily in savings and short-term borrowings. The decline in average rates
contributed $2.3 million to the change in cost, offset in part by a $2.1 million
increase in cost due to an increase in the average volume of interest-bearing
liabilities.
24
During 2000, interest expense increased $3.4 million, as compared with
the year 1999, reflecting an increase in rates, and changes in the liability mix
(including increased volumes of short-term borrowings). In April of 2000, the
Corporation also introduced a new premium rate savings account (Super Max),
which carried an above market initial teaser rate and adversely affected the
cost of funds during 2000.
The Corporation's net interest spread on a tax-equivalent basis (i.e.
the average yield on average interest-earning assets, calculated on a tax
equivalent basis, minus the average rate paid on interest-bearing liabilities)
increased 15 basis points to 3.37 percent from 3.22 percent for the
twelve-months ended December 31, 2000. The decline in interest rates during the
period decreased the cost for supporting funds and is the primary reason for the
widening in spread. The net interest spread decreased 30 basis points in 2000 as
compared with 1999, primarily as a result of the increased cost of
interest-bearing liabilities. The year 2000 generally reflected a period of
rising rates.
The contribution of non-interest-bearing sources (i.e. the differential
between the average rate paid on all sources of funds and the average rate paid
on interest-bearing sources) decreased 14 basis points during 2001 to
approximately 58 basis points on average as compared to 72 basis points on
average during the twelve-month periods ended December 31, 2000. During the
comparable periods of 2000 and 1999, there was an increase of 9 basis points to
72 basis points on average.
INVESTMENTS
For the twelve months ended December 31, 2001, the average volume of
investment securities increased by $45.6 million to $353.2 million, or 62.4
percent of earning-assets, as compared to $307.6 million or 61.6 percent for the
twelve months ended December 31, 2000. The tax-equivalent yield on investments
decreased to 6.51 percent or 41 basis points from a yield of 6.92 percent during
the twelve-month period ended December 31, 2000. The volume related factors
during the period contributed increased revenue of $2,992,000 while rate related
changes amounted to $(1,278,000). The yield on the investment portfolio during
2001 was maintained through the purchase of higher coupon callable securities to
replace, in certain cases, high yielding investments, which had matured, were
prepaid, or were called and the purchase of $20.1 million of Trust Preferred
Securities.
The impact of repricing activity on investment yields was lessened by a
change in portfolio mix, and to a lesser extent some maturity extension where
risk is relatively minimal within the portfolio, resulting in wider spreads.
Securities available-for-sale is 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, 2001, the total investment portfolio excluding
overnight investments was $417.3 million, an increase of $87.0 million. The
increased size of the investment portfolio largely reflects the Corporations
leverage strategies. This was reflected in the addition of approximately $71.5
million in mortgage-backed securities to the balance sheet in the fourth quarter
of 2001. The principal components of the investment portfolio are U.S. Treasury,
U.S. Government Federal Agency callable and non-callable securities, including
agency issued collateralized mortgage obligations, corporate securities, and
municipals. For information regarding the Corporation's investment portfolio,
see Note 4 to the Consolidated Financial Statements.
LOANS
Loan growth during 2001 occurred in all principal categories of the
loan portfolio. This growth resulted from the Corporation's business development
efforts enhanced by the Corporation's entry into new markets through expanded
branch facilities. The decrease in the loan portfolio yields for the
twelve-month period was the result of a decline in interest rates as compared
with 2000. Another contributing factor to the decline in portfolio yield was the
competitive rate pricing structure maintained by the Corporation to attract new
loans and by the heightened competition for lending relationships that exists in
the Corporation's market. The effects on additions to the portfolio were
lessened by continued re-financing activity, which was fueled, by historically
low interest rates. Heightened competition for borrowers that exist in the
Corporation's markets also kept interest spreads on loans tight. The
Corporation's desire to continue expanding this component of the earning-asset
mix is reflected in its current business, marketing and strategic plans.
25
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
- --------------------------------------------------------------------------------
Further analyzing the loan portfolio for the twelve-months ended
December 31, 2001, average loan volume increased $20.1 million or 10.84 percent,
while portfolio yield decreased by 32 basis points as compared with the same
period in 2000. The increased total average loan volume was due primarily to
increased customer activity, new lending relationships and new markets. The
volume related factors during the period-contributed increased revenue of
$1,515,000 while rate related changes amounted to $(621,000). Total average loan
volume increased to $206.0 million with a net interest yield of 7.43 percent, as
compared to $185.8 million with a yield of 7.75 percent for the twelve-months
ended December 31, 2000. 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 2001, the level of the
allowance was $2,191,000 as compared to a level of $1,655,000 at December 31,
2000. The Corporation had a provision to the allowance for loan losses of
$656,000 in 2001, $363,000 in 2000 and $108,000 in 1999. The increase in the
provision for loan losses during 2001 was commensurate with the increase in the
loan volume recorded during the year and increased focus on commercial and
residential lending.
At December 31, 2001, the allowance for loan losses amounted to 1.04
percent of total loans. In management's view, the level of the allowance at
December 31, 2001 is adequate to cover losses inherent in the loan portfolio.
Management's judgment regarding the adequacy of the allowance constitutes a
"Forward Looking Statement" under the Private Securities Litigation Reform Act
of 1995. Actual results could differ materially from management's analysis,
based principally upon the factors considered by management in establishing the
allowance.
Although management uses the best information available, the level of
the allowance for loan losses remains an estimate which is subject to
significant judgement and short-term change. Various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowance for loan losses. Such agencies may require the
Corporation to increase the allowance based on their analysis of information
available to them at the time of their examination. Furthermore, the majority of
the Corporation's loans are secured by real estate in the State of New Jersey.
Accordingly, the collectability of a substantial portion of the carrying value
of the Corporation's loan portfolio or the Central New Jersey area experience an
adverse economic shock. Future adjustments to the allowance may be necessary due
to economic, operating, regulatory and other conditions beyond the Corporation's
control. The allowance for loan losses as a percentage of total loans amounted
to 1.04 percent, 0.83 percent and 0.84 percent at December 31, 2001, 2000 and
1999, respectively.
During 2001, the Corporation did not experience any substantial
problems within its loan portfolio. Net charge-offs were $120,000 in 2001,
$131,000 in 2000 and $11,000 in 1999. During 2001, the Corporation experienced a
continued unfavorable level of charge-offs in the installment loan portfolio
compared to historic levels. The trend in the level of charge-offs was
attributed to the economic slow-down and the resulting higher level of personal
bankruptcies.
The Corporation had non-accrual loans amounting to $109,000 at December
31, 2001, $246,000 at December 31, 2000 and $292,000 at December 31, 1999. The
decrease in non-accrual loans for 2001 was attributable to a home equity loan,
which was charged off and a residential mortgage loan, which was paid in full by
the borrower. The Corporation continues to pursue aggressively collections of
principal and interest on loans previously charged-off.
26
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, 2001, total impaired loans amounted to
$1,859,000 compared with $1,461,000 at December 31, 2000, and $519,000 at
December 31, 1999. The respective reserves allocated to such loans in each year
were $279,000, $146,000 and $52,000. 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 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding 205,991 $185,846 $160,208 $138,967 $125,476
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans at end of period $211,236 $198,949 $169,089 $150,099 $132,424
- ------------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES $ 1,655 $ 1,423 $ 1,326 $ 1,269 $ 1,293
Balance at the beginning of year
Charge-offs: 0 0 0 0 2
Commercial 127 135 23 70 29
Installment loans
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 127 135 23 70 31
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Installment loans 7 4 12 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 7 4 12 7 7
- ------------------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS: 120 131 11 63 24
====================================================================================================================================
Provision for loan losses 656 363 108 120 0
====================================================================================================================================
Balance at end of year $ 2,191 $ 1,655 $ 1,423 $ 1,326 $ 1,269
====================================================================================================================================
Ratio of net charge-offs during the year to 0.06% 0.07% 0.01% 0.05% 0.02%
average loans outstanding during the year
====================================================================================================================================
Allowance for Loan Losses as a percentage 1.04% 0.83% 0.84% 0.88% 0.96%
of total loans at end of year
====================================================================================================================================
The 2001 and 2000 charge-offs of $127,000 and $135,000, respectively,
in installment loans were attributed to the economic slow-down and a resulting
higher level of personal bankruptcies.
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.
27
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
- --------------------------------------------------------------------------------
The following table sets forth, as of the dates indicated, the amount
of the Corporation's non-accrual loans, accruing loans past due 90 days or more
and other real estate owned. The Corporation had no restructured loans on any of
such dates.
AT DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Non-accrual loans $109 $246 $292 $ 41 $ 27
Accruing loans past due 90 days or more 8 2 0 24 73
Other real estate owned 0 49 73 73 0
- --------------------------------------------------------------------------------
Total non-performing assets $117 $297 $365 $138 $100
================================================================================
Non-accrual loans at December 31, 2001 decreased $137,000 from the
amount reported at December 31, 2000. The decrease in non-accrual loans was
attributable to the payment of residential first mortgage loan and the charge
off of a home equity loan.
Non-accrual loans at December 31, 2001 consisted of one commercial term
unsecured loan and one home equity loan. At December 31, 2001, total impaired
loans amounted to $1,859,000 compared with $1,461,000 at December 31, 2000; and
$519,000 at December 31, 1999. Although classified as substandard, the impaired
loans were current with respect to principal and interest payments.
At December 31, 2001 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.
The Corporation did not have any other real estate owned (OREO) at December 31,
2001. OREO at December 31, 2000 consisted of a two family residential property
with a carrying value of $49,000, while at December 31, 1999 OREO consisted of a
closed branch facility with a carrying value of approximately $73,000.
NON-INTEREST INCOME
The following table presents the principal categories of non-interest
income for each of the years in the three-year period ended December 31, 2001.
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 % CHANGE 2000 1999 % CHANGE
- ----------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees $ 1,560 $ 1,301 19.91 $ 1,301 $ 863 50.75
Other income 747 410 82.20 410 228 79.82
Gain (loss) on securities sold 181 (78) N/M (78) (2) N/M
- ----------------------------------------------------------------------------------------------------------
Total other non-interest income $ 2,488 $ 1,633 52.36 $ 1,633 $ 1,089 49.95
==========================================================================================================
For the twelve months ended December 31, 2001, total other non-interest
income, exclusive of net gains (losses) on securities sold, reflects an increase
of $596,000 or an increase of 34.83 percent compared to the comparable
twelve-month period ended December 31, 2000. This overall increase was primarily
a result of the recorded change in the net asset value of bank owned life
insurance of approximately $382,000 compared to $0 in prior years, which is
included in other income. Fee income increased, including higher levels of
letter of credit income, service charges, commissions, and fees, including ATM
surcharging which amounted to $144,000 for the twelve-month period ended
December 31, 2001, as compared to $107,000 for the comparable period in 2000.
Service charges increased primarily as a result of an increase in business
activity. Included in service charges for the 2000 period was non-recurring
income of $75,000. Other non-interest income in 2000 also contained
non-recurring income of $102,000 resulting from a gain on the sale of an OREO
property. For the 2000 period, total other non-interest income, exclusive of net
gains (losses) on securities sold, reflects an increase of $620,000 or an
increase of 56.8 percent compared to the comparable twelve-month period ended
December 31, 1999.
During 2001, the Corporation recorded net gains of $181,000, on
securities sold from the available-for-sale investment portfolio compared to
losses of $78,000 and losses of $2,000 recorded in the comparable twelve-month
periods in 2000 and 1999. The sales were made in the normal course of business
and proceeds were re invested into the securities portfolio.
28
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, 2001.
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 % CHANGE 2000 1999 % CHANGE
- ----------------------------------------------------------------------------------------------------
OTHER NON-INTEREST EXPENSE:
Salaries and employee benefits $ 7,807 $ 6,800 14.81 $ 6,800 $ 6,772 0.4
Occupancy, net 1,509 1,340 12.61 1,340 1,251 7.2
Premises and equipment 1,486 1,453 2.27 1,453 1,348 7.8
Stationery and printing 468 432 8.33 432 471 (8.3)
Marketing and advertising 487 490 (0.61) 490 504 (2.8)
Other 3,459 2,832 22.14 2,832 2,944 (3.8)
- ----------------------------------------------------------------------------------------------------
Total other non-interest expense $ 15,216 $ 13,347 14.00 $ 13,347 $ 13,290 0.4
====================================================================================================
Total non-interest expense increased $1.9 million or 14 percent in 2001
as compared with an increase of $57,000 or 0.4 percent from 1999 to 2000. The
level of operating expenses during the twelve months of 2001 increased in
several expense categories. The year-to-year increase in expenses are primarily
attributable to the continued investment in technology and the need to attract,
develop, and retain high caliber employees. Prudent management of operating
expenses has and will continue be a key objective of management in an effort to
improve earnings performance. The Corporation's ratio of other expenses to
average assets remained stable at 2.60 percent in 2001 and 2000. This ratio was
2.46 percent in 1999. The Corporation's efficiency ratio (defined as
non-interest expenses divided by tax-equivalent net interest income plus
recurring non-interest income) was 59.8 percent, 60.2 and 61.8 percent,
respectively, for 2001, 2000 and 1999.
Salaries and employee benefits, which accounted for 53.9% of the total
increase in other non-interest expense, increased $1.0 million or 14.8 percent
in 2001 over the comparable twelve-month period ended December 31, 2000.
Salaries and employee benefits accounted for 51.3 percent of total other
non-interest expense in 2001, as compared to 50.9 percent and 51.5 percent for
the years 2000 and 1999, respectively. This increase is primarily attributable
to salary and benefit expense driven by a need to attract, develop and retain
high caliber employees, in addition to normal merit increases, promotional
raises and higher benefit costs. Staffing levels overall increased to 172
full-time equivalent employees at December 31, 2001 compared to 156 full-time
equivalent employees at December 31, 2000 and 162 in 1999.
Occupancy and Bank premise and equipment expenses for the twelve months
ended December 31, 2001 increased $202,000 or 7.23 percent over the comparable
twelve-month period in 2000. This increase in Bank premise and equipment expense
in 2001 is primarily attributable to higher operating costs (utilities, rent,
real estate taxes and general repair and maintenance) of the Corporation's
expanded facilities, coupled with higher equipment maintenance and repair and
depreciation expenses. The increase in such expenses of $194,000 or 7.46 present
in 2000 over 1999 was also attributable to the increased costs of expanded bank
facilities.
Stationery and printing expenses for the twelve months increased
modestly ($36,000 or 2.27 percent) compared to 2000 and reflect lower costs
associated with the branch network despite higher business activity. These costs
increased $105,000 or 7.8 percent in 2000 from 1999, reflecting the increased
costs associated with an expanded infrastructure and branch network.
For the twelve-month period ended December 31, 2001 total other
non-interest expenses increased $627,000 or 22.14 percent over the comparable
twelve months ended December 31, 2000. Increases were attributable to increased
levels of legal and consulting expense for the twelve months of 2001, which
increased $123,000 or 32.7 percent compared to 2000 and reflect increased costs
associated with general corporate matters, as well as costs associated with a
sales training program and an expanded EDP audit function. The decrease in such
expense of $112,000 or 3.8 percent in 2000 over 1999 was due to decreased legal
and consulting costs realized in prior years connected with the formation of a
subsidiary company and the liquidation of another.
29
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
- --------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES
The Corporation's provision for income taxes increased from 2000 to
2001, primarily as a result of higher levels of taxable income. The effective
tax rates for the Corporation for the twelve months ended December 31, 2001,
2000 and 1999 were 33.05 percent, 32.32 percent and 33.70 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, an increase in the cash surrender value of bank owned life
insurance 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 $443,000 or 36.86 percent from
2000 to 2001 and decreased by $96,000 or 7.40 percent from 1999 to 2000. The
Corporation did not carry bank owned life insurance in 2000 or 1999.
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. 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" to "available-for-sale" or "trading". On the initial adoption date of
SFAS 133 as amended by SFAS 138, the Corporation transferred $25,358,000
(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 $5,000, which has been recognized in the accumulated other
comprehensive income component of stockholders' equity, as the cumulative effect
of adopting the new accounting principles.
30
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
borrowing arrangements; securities lending transactions; repurchase agreements;
loan participations, and extinguishments of liabilities. While most of the
provisions of SFAS No. 140 are effective for transactions entered into after
March 31, 2001, companies that held beneficial interests from previous
securitizations were required to make additional disclosures in their December
31, 2000 financial statements. The initial adoption of SFAS No. 140 did not have
a material impact on the financial statements of the Corporation.
SFAS No. 141
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Corporation had no business combinations subsequent to June 30, 2001, and
therefore the implementation of this standard did not have an impact on the
Corporation.
SFAS No. 142
Upon adoption of Statement 142, the Corporation is required to evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination. In addition, the Corporation is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. To the extent
an intangible asset is identified as having an indefinite useful life, the
Corporation is required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 requires the Corporation to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. The
Corporation will then have up to nine months from the date of adoption to
determine the fair value of goodwill and compare it to the carrying amount. To
the extent that the goodwill carrying amount exceeds its fair value, an
indication exists that the goodwill may be impaired and the Corporation must
perform the second step of the transitional impairment test. In the second step,
the Corporation must compare the implied fair value of the goodwill, determined
by allocating the fair value to all of it assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in accordance
with Statement 141, to its carrying amount, both of which would be measured as
of the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Corporation's statement of earnings.
As of December 31, 2001, the Corporation has $2.1 million in
unamortized goodwill with annual amortization of $323,000 which will cease upon
the adoption of SFAS No. 142, "Goodwill and Intangible Assets". The Corporation
adopted SFAS No. 142 on January 1, 2002.
31
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
- --------------------------------------------------------------------------------
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
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, 2001, the Corporation would expect a decrease of 6.62 percent in net
interest income and an increase of 1.35 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.
32
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, 2001, the Corporation reflects a negative interest
sensitivity gap (or an interest sensitivity ratio) of .60:1.00: at the
cumulative one-year position. During much of 2001, the Corporation had a
negative interest sensitivity gap. The maintenance of a liability-sensitive
position during 2001 had a favorable 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 2002. However, no assurance can be given that this objective will
be met.
33
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
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The following table depicts the Corporation's interest rate sensitivity
position at December 31, 2001:
EXPECTED MATURITY/PRINCIPAL REPAYMENT DECEMBER 31,
AVERAGE YEAR YEAR YEAR YEAR YEAR 2007 ESTIMATED
INTEREST END END END END END AND TOTAL FAIR
(DOLLARS IN THOUSANDS) RATE 2002 2003 2004 2005 2006 THEREAFTER BALANCE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING
ASSETS:
Loans 7.04% $ 68,982 $ 30,020 $ 26,464 $ 23,686 $ 17,399 $ 42,494 $ 209,045 $209,620
Investments 6.04% 124,391 54,064 48,181 39,659 25,557 125,422 417,274 417,641
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 193,373 $ 84,084 $ 74,645 $ 63,345 $ 42,956 $167,916 $ 626,319 $627,261
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit
of $100,000 or greater 2.69% $ 23,055 $ 316 $ 0 $ 0 $ 0 $ 0 $ 23,371 $ 23,403
Time certificates of deposit
of less than $100,000 3.80% 55,350 1,509 0 7 0 0 56,866 57,625
Other interest bearing
deposits 1.86% 171,500 0 0 0 0 142,576 314,076 31,407
Trust preferred securitites 5.60% 0 0 0 0 10,000 0 10,000 10,000
Securities sold under
agreements to repurchase
and FHLB advances 3.73% 72,296 0 0 0 0 60,000 132,296 133,217
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 322,201 $ 1,825 $ 0 $ 7 $ 10,000 $202,576 $ 536,609 $538,321
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning
assets 193,373 277,457 352,102 415,447 458,403 626,319 626,319
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-bearing
liabilities 322,201 324,026 324,026 324,033 334,033 536,609 536,609
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap (128,828) 82,259 74,645 63,338 32,956 (34,660) 89,710
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative rate
sensitivity gap $(128,828) $(46,569) $ 28,076 $ 91,414 $124,370 $ 89,710 $ 89,710
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative gap ratio 0.60% 0.86% 1.09% 1.28% 1.37% 1.17% 1.17%
====================================================================================================================================
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 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 prin cipal. For deposits, contractual maturities are assumed
for certificates of deposit while other interest-bearing deposits were treated
as if subject to immediate withdrawal.
34
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 cash flows, and adjusts
positions as necessary to maintain adequate levels of liquidity. By using a
variety of potential funding sources and staggering maturities, the risk of
potential funding pressure is reduced. Management also maintains a detailed
liquidity contingency plan designed to respond adequately to situations which
could lead to liquidity concerns.
The Corporation derives a significant proportion of its liquidity from its
core deposit base. At December 31, 2001, core deposits, as defined by the
Corporation (comprised of total demand and savings accounts plus money market
accounts under $100,000) represented 55.0 percent of total deposits. More
volatile rate sensitive deposits, concentrated in certificates of deposit
$100,000 and greater, decreased to 4.7 percent of total deposits from 13.7
percent at December 31, 2000. This change was due primarily to a decrease in
certain municipal deposits at year-end 2001. The following table depicts the
Corporation's core deposit mix at December 31, 2001 and 2000:
CORE DEPOSIT MIX
DECEMBER 31,
-------------------------------------------------------------------------
2001 2000 NET CHANGE
----------------------------------------------------------- VOLUME 2001
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE vs. 2000
- -------------------------------------------------------------------------------------------------------------------------
Demand Deposits $103,520 38.0 $ 93,231 40.6 $ 10,289
Interest-Bearing Demand 79,661 28.5 46,214 20.2 33,447
Regular Savings 67,681 24.6 64,883 25.3 2,798
Money Market Deposits under $100 24,222 8.9 28,003 10.9 (3,781)
- -------------------------------------------------------------------------------------------------------------------------
Total core deposits $275,084 100.0 $232,331 100.0 $ 42,753
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $497,833 $425,296 $(72,537)
- -------------------------------------------------------------------------------------------------------------------------
Core deposits to total deposits 55% 55%
=========================================================================================================================
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 2001 amounted to approximately
$59.4 million, an increase of $24.2 million or 68.8 percent from the 2000
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) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Average Interest rate:
At year end 2.35% 4.65% 3.09%
For the year 3.30% 4.46% 3.24%
Average amount outstanding during the year: $59,425 $35,205 $19,484
Maximum amount outstanding at any month end: $90,079 $51,262 $30,752
Amount outstanding at year end: $72,296 $51,262 $30,752
=======================================================================================================
35
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
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CASH FLOWS
The consolidated statements of cash flows present the changes in cash
and cash equivalents from operating, investing and financing activities. During
2001 cash and cash equivalents (which increased overall by $7.4 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 deposits
and short-term borrowings, were used in investing activities, primarily the
increased volume of investment securities, loans and purchase of bank owned life
insurance.
STOCKHOLDERS' EQUITY
Stockholders' equity averaged $42.7 million during 2001, an increase of
$5.4 million or 14.6 percent, as compared to 2000. At December 31, 2001,
stockholders' equity totaled $44.3 million, an increase of $5.1 million from
December 31, 2000. Such increase resulted from an increase of $780,000 of net
unrealized gains (net of tax) on securities available-for-sale, net increases of
$4,079,000 attributable to net income and issuance of common stock less cash
dividends paid. The Corporation's dividend reinvestment and optional stock
purchase plan contributed $255,000 in new capital during 2001. Book value per
share at year-end 2001 was $11.17 compared to $10.02 at year-end 2000. Tangible
book value at year-end 2001 was $10.65 compared to $9.40 for 2000.
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.
36
RISK-BASED CAPITAL/LEVERAGE
At December 31, 2001, the Corporation's total Tier 1 capital (defined
as tangible stockholders' equity for common stock and Trust Preferred Capital
Securities) amounted to $51.1 million or 7.43 percent of total assets. The Tier
I leverage capital ratio was 7.77 percent of total average assets. Tier I
capital excludes the effect of SFAS No. 115, which amounted to $1,120,000 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 $2,091,000 as of December 31, 2001. 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, 2001, the Corporation's Tier I and total risk-based capital ratios
were 12.37 percent and 13.13 percent, respectively. These ratios are well above
the minimum guidelines of capital to risk-adjusted assets in effect as of
December 31, 2001. For information on risk-based capital and regulatory
guidelines for the Corporation's bank subsidiary, 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, 2001, the
Corporation had 543 common stockholders of record. This does not include
beneficial owners for whom CEDE & Company or others act as nominees. On December
31, 2001, the closing market bid and asked price was $18.95-$19.00,
respectively.
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
2001 2000 DECLARED
- ----------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
BID BID BID BID 2001 2000
- ----------------------------------------------------------------------------------------------------------
Fourth Quarter $19.40 $17.60 $21.00 $14.50 $0.1425 $0.1425
Third Quarter $21.37 $17.10 $18.75 $13.00 $0.1500 $0.1425
Second Quarter $22.05 $15.33 $21.63 $15.13 $0.1500 $0.1425
First Quarter $20.00 $16.43 $17.13 $13.50 $0.1500 $0.1425
- ----------------------------------------------------------------------------------------------------------
$0.5925 $0.5700
==========================================================================================================
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, 2001.
37
[LOGO] Center Bancorp, Inc.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS continued
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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 constitutes a forward-looking
statement under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those projected in the Corporation's
forward-looking statements due to numerous known and unknown risks and
uncertainties, including the factors referred to above and in other sections of
this Annual Report.
38
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(TAX-EQUIVALENT BASIS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
INTEREST EARNING ASSETS:
Investment securities:(1)
Taxable $ 342,247 $ 22,236 6.50% $ 290,405 $ 20,079 6.91% $ 281,582 $ 18,585 6.60%
Non-taxable 10,968 759 6.92% 17,195 1,202 6.99% 19,128 1,298 6.79%
Federal funds sold and
securities purchased under
agreement to resell 6,771 331 4.89% 5,924 376 6.35% 8,813 452 5.13%
Loans, net of unearned
income:(2) 205,991 15,301 7.43% 185,846 14,407 7.75% 160,208 12,198 7.61%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 565,977 38,627 6.82% 499,370 36,064 7.22% 469,731 32,533 6.93%
====================================================================================================================================
NON-INTEREST EARNING ASSETS:
Cash and due from banks 17,293 16,648 13,798
Other assets 26,784 20,259 18,496
Allowance for possible
loan losses (1,865) (1,513) (1,359)
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest
earning assets 42,212 35,394 30,935
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 608,189 $ 534,764 $ 500,666
====================================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Money market deposits $ 78,878 2,042 2.59% $ 75,904 2,491 3.28% $ 69,831 2,148 3.08%
Savings deposits 118,209 3,438 2.91% 90,644 2,698 2.98% 74,393 1,449 1.95%
Time deposits 98,710 4,529 4.59% 116,449 6,249 5.37% 122,478 5,676 4.63%
Other interest-bearing
deposits 48,590 672 1.38% 45,568 806 1.77% 46,378 740 1.60%
Short term borrowings
and FHLB advances 119,565 5,304 4.44% 75,998 3,939 5.18% 62,713 2,788 4.45%
Trust Preferred Securities 384 22 5.60% 0 0 0.00% 0 0 0.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 464,336 16,007 3.45% 404,563 16,183 4.00% 375,793 12,801 3.41%
====================================================================================================================================
NON-INTEREST-BEARING LIABILITIES:
Demand deposits 95,213 88,858 84,140
Other non-interest bearing
deposits 964 466 397
Other liabilities 4,971 3,614 3,138
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing
liabilities 101,148 92,938 87,675
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 42,705 37,263 37,198
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 608,189 $ 534,764 $ 500,666
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $ 22,620 $ 19,881 $ 19,732
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.37% 3.22% 3.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income as percent of
earning assets (margin) 4.00% 3.98% 4.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment(3) (258) (409) (441)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 22,362 $ 19,472 $ 19,291
====================================================================================================================================
(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.
39
[LOGO] Center Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 3) $ 29,668 $ 22,274
Investment securities held to maturity (approximate market
value of $205,604 in 2001 and $173,224 in 2000) 205,237 173,754
Investment securities available-for-sale 212,037 156,513
- --------------------------------------------------------------------------------------------------------------------
Total investment securities (Note 4 and 7) 417,274 330,267
Loans, net of unearned income (Note 5 and 7) 211,236 198,949
Less--Allowance for loan losses (Note 5) 2,191 1,655
- --------------------------------------------------------------------------------------------------------------------
Net loans 209,045 197,294
Premises and equipment, net (Note 6) 11,685 10,045
Accrued interest receivable 4,542 5,839
Bank owned separate account life insurance 13,000 0
Other assets (Note 9) 2,298 1,420
Goodwill (Note 2) 2,091 2,414
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 689,603 $ 569,553
====================================================================================================================
LIABILITIES
DEPOSITS:
Non-interest bearing $ 103,520 $ 93,231
Interest bearing:
Certificates of deposit $100,000 and over 23,371 58,231
Savings and time deposits 370,942 273,834
- --------------------------------------------------------------------------------------------------------------------
Total deposits 497,833 425,296
Federal funds purchased and securities sold under agreements to
repurchase (Note 7) 72,296 51,262
Federal Home Loan Bank advances (Note 7) 60,000 50,000
Corporation - obligated Mandatorily redeemable trust preferred securities
of subsidiary trust holding solely junior subordinated debentures of the
Corporation (Note 11) 10,000 0
Accounts payable and accrued liabilities (Notes 8 and 9) 5,178 3,813
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 645,307 530,371
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 15)
STOCKHOLDERS' EQUITY (NOTES 10 AND 14)
COMMON STOCK, NO PAR VALUE:
Authorized 20,000,000 shares; issued 4,507,262 and 4,483,521
shares in 2001 and 2000, respectively 14,677 11,015
Additional paid in capital 4,180 4,049
Retained earnings 28,569 28,308
Treasury stock at cost (542,610 and 571,716 shares in 2001
and 2000, respectively) (4,115) (4,474)
Restricted stock (Note 8) (135) (56)
Accumulated other comprehensive income 1,120 340
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 44,296 39,182
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 689,603 $ 569,553
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA 2001 2000 1999
- -------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 15,301 $ 14,407 $ 12,198
Interest and dividends on investment securities:
Taxable interest income 21,334 19,586 18,241
Non-taxable interest income 501 793 857
Dividends 902 493 344
Interest on Federal funds sold and securities purchased
under agreement to resell 331 376 452
- -------------------------------------------------------------------------------------------------
Total interest income 38,369 35,655 32,092
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on certificates of deposit $100,000 and over 1,465 3,482 2,703
Interest on other deposits 9,216 8,762 7,310
Interest on borrowings 5,326 3,939 2,788
- -------------------------------------------------------------------------------------------------
Total interest expense 16,007 16,183 12,801
- -------------------------------------------------------------------------------------------------
Net interest income 22,362 19,472 19,291
Provision for loan losses (Note 5) 656 363 108
- -------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,706 19,109 19,183
- -------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees 1,560 1,301 863
Other income 747 410 228
Loss on securities sold (Note 4) 181 (78) (2)
- -------------------------------------------------------------------------------------------------
Total other income 2,488 1,633 1,089
- -------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits (Note 8) 7,807 6,800 6,772
Occupancy, net (Note 14) 1,509 1,340 1,251
Premises and equipment (Notes 6 and 14) 1,486 1,453 1,348
Stationery and printing 468 432 471
Marketing and advertising 487 490 504
Other 3,459 2,832 2,944
- -------------------------------------------------------------------------------------------------
Total other expense 15,216 13,347 13,290
- -------------------------------------------------------------------------------------------------
Income before income tax expense 8,978 7,395 6,982
Income tax expense (Note 9) 2,967 2,390 2,353
- -------------------------------------------------------------------------------------------------
Net income $ 6,011 $ 5,005 $ 4,629
- -------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 1.53 $ 1.26 $ 1.17
Diluted $ 1.51 $ 1.26 $ 1.16
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 3,939,792 3,963,206 3,964,638
Diluted 3,972,627 3,984,039 3,989,664
=================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
[LOGO] Center Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON ACCUMULATED TOTAL
STOCK COMMON ADDITIONAL OTHER STOCK-
SHARES STOCK PAID IN RETAINED TREASURY RESTRICTED COMPREHENSIVE HOLDERS'
OUTSTANDING AMOUNT CAPITAL EARNINGS STOCK STOCK INCOME(LOSS) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,578,149 $ 7,616 $ 3,660 $25,978 $(1,736) $ 0 $ 1,113 $36,631
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR 1999
Cash dividend (2,213) (2,213)
Common stock dividend 179,260 2,826 (2,826)
Issuance of common stock 20,920 318 318
Exercise of stock options 11,600 93 45 138
Restricted stock award 4,548 54 17 (71)
Comprehensive income:
Net income 4,629 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 3,794,477 $ 10,760 $ 3,807 $25,568 $(1,674) $ (71) $(1,877) $36,513
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR 2000
Cumulative effect of a change in
accounting principle
(net of tax of $2) 5
Cash dividend (2,265) (2,265)
Issuance of common stock 16,579 255 255
Exercise of stock options 31,719 242 131 373
Restricted stock award 15 15
Repurchase of common stock (117,246) (2,931) (2,931)
Comprehensive income:
Net income 5,005 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 3,725,529 $ 11,015 $ 4,049 $28,308 $(4,474) $ (56) $ 340 $39,182
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR 2001
Cash dividend (2,338) (2,338)
Common stock dividend 187,311 3,407 (3,412) (5)
Issuance of common stock 13,732 255 255
Exercise of stock options 33,080 131 359 490
Restricted stock award 5,000 (79) (79)
Comprehensive income:
Net income 6,011 6,011
Unrealized holding gains on
securities arising during the
period (net of taxes of $463) 899
Less reclassification adjustment
for gains included in net
income (net of tax of $62) (119)
Net unrealized holding gain on -------
securities arising during the
period (net of tax of $401) 780 780
-------
Total comprehensive income 6,791
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31,2001 3,964,652 $ 14,677 $ 4,180 $28,569 $(4,115) $(135) $ 1,120 $44,296
====================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,011 $ 5,005 $ 4,629
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,894 1,543 1,465
Provision for loan losses 656 363 108
Provision for deferred taxes (286) (326) (267)
(Gain) Loss on sale of investment securities available-for-sale (181) 78 2
Decrease (increase) in accrued interest receivable 1,297 (1,112) (607)
(Increase) decrease in other assets (641) 935 (1,024)
Increase (decrease) in other liabilities 1,365 709 (492)
Proceeds from the sale of other real estate owned 45 175 0
Loss (gain) on sale of other real estate owned 4 (102) 0
Amortization of premium and accretion of discount on
investment securities, net 84 39 7
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,248 7,307 3,821
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 119,742 22,127 25,871
available-for-sale
Proceeds from maturities of investment securities held to
maturity 98,670 15,371 54,178
Proceeds from redemption of FHLB stock 310 4,803 0
Proceeds from sales of investment securities available-for-sale 27,660 26,357 2,997
Purchase of securities available-for-sale (204,607) (62,542) (35,743)
Purchase of securities held to maturity (127,905) (30,343) (66,272)
Net increase in loans (12,407) (29,991) (19,001)
Property and equipment expenditures, net (3,211) (1,488) (1,494)
Purchase of bank owned life insurance (13,000) 0 0
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (114,748) (55,706) (39,464)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 72,537 36,041 12,088
Net increase in borrowings 21,034 20,510 28,150
Increase in FHLB advances 10,000 0 0
Dividends paid (2,338) (2,265) (2,213)
Proceeds from issuance of common stock 661 643 318
Issuance of Mandatorily Redeemable Securities of Subsidiary
Trust 10,000 0 0
Repurchase of common stock 0 (2,931) 0
Net cash provided by financing activities 111,894 51,998 38,343
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 7,394 3,599 2,700
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 22,274 18,675 15,975
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 29,668 $ 22,274 $ 18,675
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ----------------------------------------------------------------------------------------------------
Interest paid on deposits and short term borrowings $ 16,005 $ 15,851 $ 12,293
Income taxes $ 2,750 $ 2,278 $ 2,505
Transfer of investment securities held to maturity
to investment securities available-for-sale $ 0 $ 25,358 $ 0
====================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp, Inc. (the
Corporation) are prepared on the accrual basis and include the accounts of the
Corporation and its wholly owned subsidiaries, Union Center National Bank and
its subsidiaries (the Bank) and Center Bancorp Statutory Trust I. All
significant inter-company 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 and state agencies and undergoes
periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with 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 the reported 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.
44
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. 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.
45
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 1: SUMMARY OF SIGNICANT 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 a 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 dividends distributed on June 1, 2001 and in 1999.
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) 2001 2000 1999
- --------------------------------------------------------------------------------
Net income $6,011 $5,005 $4,629
- --------------------------------------------------------------------------------
Average number of common shares outstanding 3,940 3,963 3,965
Effect of dilutive options 25 17 23
Effect of restricted stock awards 8 4 2
- --------------------------------------------------------------------------------
Average number of common shares outstanding used to
calculate diluted earnings per common share 3,973 3,984 3,990
- --------------------------------------------------------------------------------
Net income per share
Basic $ 1.53 $ 1.26 $ 1.17
Diluted $ 1.51 $ 1.26 $ 1.16
================================================================================
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.
46
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 2001, 2000, and 1999 is presented in
the Consolidated Statements of Changes in Stockholders' Equity.
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 2000 and 1999 to conform to the classifications presented in
2001.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
SFAS NO. 141
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment in
accordance with SFAS No. 121, Accounting for the impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. The Corporation had no business
combinations subsequent to June 30, 2001, and therefore the implementation of
this standard did not have an impact on the Corporation.
SFAS NO. 142
Upon adoption of Statement 142, the Corporation is required to evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination. In addition, the Corporation is required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. To the extent
an intangible asset is identified as having an indefinite useful life, the
Corporation is required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with transitional goodwill impairment evaluation,
Statement 142 requires the Corporation to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. The
Corporation will then have up to nine months from the date of adoption to
determine the fair value of goodwill and compare it to the carrying amount. To
the extent that the goodwill carrying amount exceeds its fair value, an
indication exists that the goodwill may be impaired and the Corporation must
perform the second step of the transitional impairment test. In the second step,
the Corporation must compare the implied fair value of the goodwill, determined
by allocating the fair value to all of its assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in accordance
with Statement 141, to its carrying amount, both of which would be measured as
of the date of adoption. This second step is required to be complete as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Corporation's statement of earnings.
As of December 31, 2001, the Corporation has $2.1 million in
unamortized goodwill with annual amortization of $323,000 which will cease upon
the adoption of SFAS No. 142, "Goodwill and Intangible Assets." The Corporation
adopted SFAS No. 142 on January 1, 2002.
47
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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 $66,000 and $28,000 at December 31, 2001 and 2000,
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,
2001 and 2000.
DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------
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 $129,575 $ 984 $ 1,573 $128,986
Obligations of U.S. States and political
subdivisions 25,509 397 166 25,740
Other securities 50,153 986 261 50,878
- ----------------------------------------------------------------------------------------
$205,237 $2,367 $ 2,000 $205,604
========================================================================================
DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------
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 $141,931 $ 909 $ 670 $142,170
Obligations of U.S. states and political
subdivisions 10,080 188 4 10,264
Other securities 52,684 1,533 103 54,114
FHLB Stock and other equity securities 5,489 0 0 5,489
- ----------------------------------------------------------------------------------------
$210,184 $2,630 $ 777 $212,037
========================================================================================
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 0 19,254
- ----------------------------------------------------------------------------------------
$173,754 $ 293 $ 823 $173,224
========================================================================================
48
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 0 36,298
FHLB Stock and other equity securities 5,799 0 0 5,799
- ----------------------------------------------------------------------------------------
$155,948 $ 783 $ 218 $156,513
========================================================================================
The following table presents information for investments in securities
held to maturity and debt securities available-for-sales at December 31, 2001,
based on scheduled maturities. Actual maturities can be expected to differ from
scheduled maturities due.
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 $39,149 $ 39,173 $55,320 $56,608
Due after one year through five years 86,908 86,978 91,767 92,628
Due after five years through ten years 35,852 35,164 28,979 28,056
Due after ten years 43,328 44,289 28,629 30,056
- ---------------------------------------------------------------------------------------------------------------
$205,237 $205,604 $204,695 $206,548
==============================================================================================================
During 2001, securities sold from the Corporation's available-for-sale
portfolio amounted to approximately $27.5 million. The gross realized losses on
securities sold amounted to $138,741, while the gross realized gains amounted to
$319,541 in 2001. Securities sold from the Corporation's available-for-sale
portfolio during 2000 amounted to $26.4 million with a gross realized gain of
$33,143 and a gross realized losses of $111,989. Securities sold from the
Corporation's available-for-sales 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.
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
$25,358,000 (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 $5,000, which has been recognized in the
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.
Investment securities having a carrying value of approximately $149.4
million and $137.4 million at December 31, 2001 and 2000, respectively, were
pledged to secure public deposits, short-term borrowings, FHLB advances and for
other purposes required or permitted by law.
49
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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, 2001 and 2000, respectively:
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------
Real estate--residential mortgage $116,335 $117,762
Real estate--commercial 52,805 36,830
Commercial and industrial 36,917 38,450
Installment 4,808 4,893
All other 371 1,014
- --------------------------------------------------------------------------------
Loans $211,236 $198,949
================================================================================
At December 31, 2001 and 2000 loans to officers and directors
aggregated approximately $3,477,000 and $3,582,000 respectively. During the year
ended December 31, 2001, the Corporation made new loans to officers and
directors in the amount of $1,433,000; payments by such persons during 2001
aggregated $1,538,000. 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) 2001 2000 1999
- --------------------------------------------------------------------------------
Balance at the beginning of year $ 1,655 $ 1,423 $ 1,326
Provision for loan losses 656 363 108
Loans charged-off (127) (135) (23)
Recoveries on loans previously charged-off 7 4 12
- --------------------------------------------------------------------------------
Balance at the end of year $ 2,191 $ 1,655 $ 1,423
================================================================================
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, 2001, 2000 and 1999 were as follows:
(DOLLARS IN THOUSANDS) 2001 2000 1999
- --------------------------------------------------------------------------------
Loans past due in excess of 90 days
and still accruing $ 8 $ 2 $ 0
Non-accrual loans 109 246 292
Other real estate owned 0 49 73
- --------------------------------------------------------------------------------
Total non-performing assets $ 117 $ 297 $ 365
================================================================================
The amount of interest income that would have been recorded on
non-accrual loans in 2001, 2000 and 1999 had payments remained in accordance
with the original contractual terms approximated $1,000, $19,000 and $15,000
respectively, while no interest income was received on these types of assets in
2001, 2000 and 1999.
At December 31, 2001, total impaired loans were approximately
$1,859,000 compared to $1,461,000 at December 31, 2000 and $519,000 at December
31, 1999. The respective reserves allocated to such loans in each year were
$279,000, $146,000 and $52,000. Although classified as substandard, the impaired
loans were current with respect to principal and interest payments. The
Corporation's total average impaired loans were $1,897,000 during 2001,
$1,484,000 during 2000 and $493,000 during 1999. Interest income on impaired
loans totaled $161,000 in 2001, $138,000 in 2000 and $41,000 in 1999.
At December 31, 2001, there were no commitments to lend additional
funds to borrowers whose loans were non-accrual or contractually past due in
excess of 90 days and still accruing interest.
The policy of the 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.
50
NOTE 6: BANK PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Bank premise and equipment are summarized as follows:
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------
Land $ 2,403 $ 2,403
Buildings 7,151 6,174
Furniture, fixtures and equipment 10,754 8,937
Leasehold improvements 1,457 1,441
================================================================================
Subtotal 21,765 18,955
Less accumulated depreciation and amortization 10,080 8,910
- --------------------------------------------------------------------------------
Total $11,685 $10,045
================================================================================
Depreciation expense for the three years ended December 31, 2001
amounted to $1,276,465 in 2001, $1,220,560 in 2000 and $1,142,743 in 1999,
respectively.
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
- --------------------------------------------------------------------------------
At December 31, 2001 and 2000, advances from the Federal Home Loan Bank
of New York (FHLB) amounted to $60,000,000 and $50,000,000, respectively. The
FHLB advances had a weighted average interest rate of 5.48 percent and 5.50
percent at December 31, 2001 and December 31, 2000, 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 and at December 31, 2001, and 2000
are contractually scheduled for repayment as follows:
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------
2010 $50,000 $50,000
2011 10,000 0
- --------------------------------------------------------------------------------
Total $60,000 $50,000
================================================================================
Other borrowings consisting of securities sold under agreements to
repurchase had average balances of $59,425,000, $35,205,000, and $19,484,000,
for the years ended December 31, 2001, 2000 and 1999, respectively. The maximum
amount outstanding at any month end during 2001, 2000 and 1999, respectively,
was $90,079,000, $51,262,000 and $30,752,000. The average interest rate paid on
securities sold under agreements to repurchase were 3.30%,4.46%, and 3.24% for
the years ended December 31, 2001, 2000 and 1999, respectively.
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 1999, 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 $70,200 in 2001 and $66,000 for
2000 and 1999, respectively, and is included in non-interest expense.
51
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 8: PENSION AND BENEFITS continued
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, 2001 and 2000.
CHANGE IN BENEFFF OBLIGATION (DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------
Projected benefit obligation at beginning of year $ 5,324 $ 5,426
Service cost 373 382
Interest cost 414 385
Actuarial loss (gain) 511 (630)
Benefits loss paid (274) (239)
- --------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 6,348 $ 5,324
================================================================================
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning year $ 4,523 $ 4,486
Actual return on plan assets (168) (95)
Employer contributions 396 371
Benefits paid (274) (239)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,477 $ 4,523
================================================================================
Funded status $(1,871) $ (801)
Unrecognized net asset (3) (7)
Unrecognized prior service cost 96 110
Unrecognized net actuarial gain 368 (682)
- --------------------------------------------------------------------------------
Accrued benefit cost $(1,410) $(1,380)
================================================================================
The net periodic pension cost for 2001, 2000 and 1999 includes the
following components.
(DOLLARS IN THOUSANDS) 2001 2000 1999
- --------------------------------------------------------------------------------
Service cost $ 373 $ 382 $ 335
Interest cost 414 385 334
Expected return on plan assets (377) (376) (281)
Net amortization and deferral (18) (6) (69)
- --------------------------------------------------------------------------------
Net periodic pension expense $ 392 $ 385 $ 319
================================================================================
The following table presents the assumptions used to calculate the
projected benefit obligation in each of the last three years.
2001 2000 1999
- --------------------------------------------------------------------------------
Discount rate 7.25% 8.00% 7.50%
Rate of compensation increase 5.75% 7.00% 6.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
================================================================================
401K BENEFIT PLAN
The Corporation maintains a 401K employee savings plan to provide for
defined contributions which covers substantially all employees of the Bank. The
Corporation's contributions to the plan are limited to fifty percent of a
matching percentage of each employee's contribution up to six percent of the
employee's salary. For 2001, 2000, and 1999, employer contributions amounted to
$92,000, $82,000 and $74,000, respectively.
52
STOCK OPTION PLANS
The Corporation's 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 Plan, an aggregate of 187,950 shares are authorized for issuance. Such
shares may be treasury shares, newly issued shares or a combination thereof.
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.
Changes in options outstanding during the past three years were as
follows:
EXERCISE PRICE RANGE
STOCK OPTION PLAN SHARES PER SHARE
- --------------------------------------------------------------------------------
Outstanding, December 31, 1998,
(157,631 shares exercisable) 168,291 $10.46 to $12.52
Granted during 1999 45,119 $14.76
Exercised during 1999 (12,285) $10.46 to $11.24
Expired or canceled during 1999 0
- --------------------------------------------------------------------------------
Outstanding, December 31, 1999,
(150,539 shares exercisable) 201,125 $10.46 to $14.76
Granted during 2000 0
Exercised during 2000 (33,304) $11.24
Expired or canceled during 2000 (4,405) $14.76
- --------------------------------------------------------------------------------
Outstanding, December 31, 2000,
(132,870 shares exercisable) 163,416 $10.46 to $14.76
Granted during 2001 32,818 $18.75
Exercised during 2001 (34,108) $11.24
Expired or canceled during 2001 (708) $14.76
- --------------------------------------------------------------------------------
Outstanding, December 31, 2001
(108,579 shares exercisable) 161,417 $10.46 to $18.75
================================================================================
53
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 8: PENSION AND BENEFITS continued
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.
o Dividend yield of 4.00%
o Expected volatility of 22.0%
o Risk-free interest rate of 6.30% based upon equivalent-term
Treasury Rates
o Expected options lives of 10 years, which were contractual
lives at the date of grant
The following weighted average assumptions were used for the grant of
options in 2001.
o Dividend yield of 4.00%
o Expected volatility of 30.6%
o Risk-free interest rate of 4.28% based upon equivalent-term
Treasury Rates
o Expected options lives of 10 years, which 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, 2001, 2000 and 1999.
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED OPTIONS WEIGHTED
GRANTED AVERAGE GRANTED AVERAGE GRANTED AVERAGE
FAIR VALUE FAIR VALUE FAIR VALUE
- -------------------------------------------------------------------------------------------------------------
Incentive stock options 0 $0.00 0 $0.00 0 $0.00
Non-qualifying stock options 0 $0.00 0 $0.00 45,119 $2.97
Director's plan 32,818 $4.40 0 $0.00 0 $0.00
- -------------------------------------------------------------------------------------------------------------
Total 32,818 $4.40 0 $0.00 45,119 $2.97
=============================================================================================================
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 $5,000 in 2001, $19,000 in 2000 and
$30,000 in 1999, which would have changed the Corporation's basic and diluted
earnings per share, by $0.00 in 2001 and $.01 in 2000 and 1999.
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 2001, 5,000 shares were awarded and issued from
Treasury shares. During 1999, 4,548 shares were awarded and issued from Treasury
shares. The fair value of the shares at the date of the award is amortized into
salary expense over the vesting period. There were no awards of restricted stock
in 2000. The amount of compensation costs related to restricted stock awards
included in salary expense was approximately $107,500 in 2001 and $15,000 in
2000 and $7,000 in 1999. As of December 31, 2001, 6,819 shares of the restricted
stock awards were vested.
54
NOTE 9: INCOME TAXES
- --------------------------------------------------------------------------------
The current and deferred amounts of income tax expense for the years ended
December 31, 2001, 2000 and 1999, respectively, are as follows:
(DOLLARS IN THOUSANDS) 2001 2000 1999
- --------------------------------------------------------------------------------
CURRENT:
Federal $ 3,129 $ 2,620 $ 2,526
State 124 96 94
- --------------------------------------------------------------------------------
3,253 2,716 2,620
================================================================================
DEFERRED:
Federal (249) (247) (263)
State (37) (79) (4)
- --------------------------------------------------------------------------------
(286) (326) (267)
- --------------------------------------------------------------------------------
Income tax expense $ 2,967 $ 2,390 $ 2,353
================================================================================
The amount of income tax (benefit) included in the comprehensive income
was $733,000, $226,000 and ($1,248,000), for the years ended December 31, 2001,
2000 and 1999, respectively.
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) 2001 2000 1999
- --------------------------------------------------------------------------------
Income before income tax expense $ 8,978 $ 7,395 $ 6,982
Federal statutory rate 34% 34% 34%
- --------------------------------------------------------------------------------
Compute "expected" Federal income tax expense 3,053 2,514 2,374
State tax net of Federal tax benefit 57 63 59
Decrease in valuation allowance 0 (54) (4)
Bank owned life insurance (130) 0 0
Tax-exempt interest and dividends (177) (270) (291)
Goodwill 110 110 110
Other, net 54 27 215
- --------------------------------------------------------------------------------
Income tax expense $ 2,967 $ 2,390 $ 2,353
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
2001 and 2000 are presented below:
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses $ 616 $ 433
Pension expense 895 847
Organization cost 52 68
- --------------------------------------------------------------------------------
Total gross deferred tax asset 1,563 1,348
- --------------------------------------------------------------------------------
Net deferred tax asset $ 1,563 $ 1,348
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciation $ 239 $ 276
Market discount accretion 135 128
Deferred fee expense-mortgages 258 295
Unrealized gains on securities available-for-sale 733 226
Other 11 15
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 1,376 940
- --------------------------------------------------------------------------------
Net deferred tax asset $ 187 $ 408
================================================================================
Based on the Corporation's historical and current pre-tax earnings and
the availability of net operating loss carry-backs 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,
2001 and 2000, respectively.
55
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 10: REGULATORY CAPITAL REQUIREMENTS
- --------------------------------------------------------------------------------
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 2001, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.00% and 8.00%, 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 5.00%; a Tier 1 risk-based
capital ratio of at least 6.00%; and a total risk-based capital ratio of at
least 10.00%.
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, 2001, 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, 2001 and 2000, 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, 2001
Leverage (Tier 1) capital $ 46,949 7.15% $ 26,319 4.00% $ 32,794 5.00%
- ----------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL: 46,949 11.34% 16,567 4.00% 24,851 6.00%
Tier 1
Total 49,140 11.86% 33,135 8.00% 41,418 10.00%
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------
Leverage (Tier 1) capital $ 36,298 12.84% $ 22,229 4.00% $ 27,665 5.00%
- ----------------------------------------------------------------------------------------------------
Risk-based capital:
- ----------------------------------------------------------------------------------------------------
Tier 1 36,298 6.56% 11,309 4.00% 16,963 6.00%
- ----------------------------------------------------------------------------------------------------
Total 37,953 13.42% 22,617 8.00% 28,271 10.00%
====================================================================================================
CAPITAL RATIOS FOR CENTER BANCORP, INC.
======================================================================================================
MINIMUM AS OF STATUTORY
AS OF DECEMBER 31, REQUIRED WELL DECEMBER 31, MINIMUM
(DOLLARS IN THOUSANDS) 2001 2000 AMOUNT CAPITALIZED 2001 CAPITAL
- ------------------------------------------------------------------------------------------------------
Tier 1 Leverage 7.77% 6.60% 4.00% 5.00% $ 51,082 $ 26,280
Tier 1 Risk-Based Capital 12.37% 13.24% 4.00% 6.00% $ 51,082 $ 16,578
Total Risk-Based Capital 13.13% 13.79% 8.00% 10.00% $ 54,401 $ 33,156
======================================================================================================
56
NOTE 11: CORPORATION - OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATE DEBENTURES OF
THE CORPORATION
- --------------------------------------------------------------------------------
During 2001, the Corporation formed a statutory business trust under
the laws of the State of Connecticut, which exists for the exclusive purpose of
(i) issuing Trust Securities representing undivided beneficial interests in the
assets of the Trust; (ii) investing the gross proceeds of the Trust Securities
in junior subordinated deferrable interest debentures (subordinated debentures)
of the Corporation; and (iii) engaging in only those activities necessary or
incidental thereto. These subordinated debentures and the related income effects
are eliminated in the consolidated financial statements. Distributions on the
mandatorily redeemable securities of subsidiary trusts below have been
classified as interest expense in the Consolidated Statement of Income.
The following table summarizes the mandatorily redeemable trust
preferred securities of the Corporation's subsidiary trust at December 31, 2001.
Redeemable By
Issuance Date Securities Issued Liquidation Value Coupon Rate Maturity Issuer Beginning
- ------------------------------------------------------------------------------------------------------------------
12/18/01 $10,000,000 $1,000 per Capital Floating 12/18/31 12/18/06
Security 3-month LIBOR
& 360 Basis Points
NOTE 12: 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, 2001 and 2000. 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.
57
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS continued
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.
The estimated fair value of the Corporation's financial instruments is
as follows:
CONDENSED STATEMENTS OF INCOME
DECEMBER 31,
- ------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 29,668 $ 29,668 $ 22,274 $ 22,274
Investments Available-for-Sale 212,037 212,037 156,513 156,513
Investments Held to Maturity 205,237 205,604 173,754 173,224
Net loans 209,045 209,620 197,294 194,362
FINANCIAL LIABILITIES:
- ------------------------------------------------------------------------------------------
Non-interest bearing deposits 103,520 103,520 93,231 93,231
Interest-bearing deposits 394,313 395,104 332,065 332,043
Federal funds purchased, securities sold under
agreement to repurchase and FHLB advances $132,296 $133,217 $101,262 $101,262
Securities of Subsidiary Trust $ 10,000 $ 10,000 $ 0 $ 0
==========================================================================================
NOTE 13: PARENT CORPORATION ONLY FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Center Bancorp, Inc. operates its wholly owned subsidiary, Union Center
National Bank and Center Bancorp Statutory Trust I. The earnings of those
subsidiaries are recognized by the Corporation using the equity method of
accounting. Accordingly, earnings are recorded as increases in the Corporation's
investment in the subsidiaries and dividends paid reduce the investment in the
subsidiaries. The ability of the 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 14).
58
Condensed financial statements of the Parent Corporation only are as follows:
CONDENSED STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
AT DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 4,193 $ 128
Investment in subsidiary 50,473 39,056
Other assets 900 566
- --------------------------------------------------------------------------------
Total assets $55,566 $39,750
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 960 $ 568
Subordinated Debentures 10,310 0
Stockholders' equity 44,296 39,182
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $55,566 $39,750
================================================================================
CONDENSED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Income
Dividend income from subsidiary $1,937 $4,658 $1,663
Management fees 32 32 59
- ------------------------------------------------------------------------------------------------
Total Income 1,969 4,690 1,722
Expenses 285 164 173
- ------------------------------------------------------------------------------------------------
Net income before equity in earnings of subsidiary 1,684 4,526 1,549
Undistributed equity in earnings of subsidiary 4,327 479 3,080
- ------------------------------------------------------------------------------------------------
Net Income $6,011 $5,005 $4,629
================================================================================================
59
[LOGO] Center Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 13: PARENT CORPORATION ONLY FINANCIAL STATEMENTS continued
CONDENSED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2001 2000 1999
- -------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 6,011 $ 5,005 $ 4,629
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed equity in earnings of subsidiary (4,327) (479) (3,080)
Other, net (26) 13 (1)
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 1,658 4,539 1,548
=====================================================================================
INVESTING ACTIVITIES:
Investments in subsidiaries (6,310) 0 0
Net cash used in investing activities (6,310) 0 0
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends (2,338) (2,265) (2,213)
Proceeds from exercise of stock options 490 388 138
Proceeds from issuance of common stock 255 255 318
Proceeds from issuance of Subordinated Debentures 10,310 0 0
Purchase of Treasury Stock 0 (2,931) 0
- -------------------------------------------------------------------------------------
Net cash used in financing activities 8,717 (4,553) (1,757)
- -------------------------------------------------------------------------------------
(Decrease) increase in cash 4,065 (16) (209)
Cash and cash equivalents at beginning of year 128 144 353
- -------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 4,193 $ 128 $ 144
=====================================================================================
NOTE 14: DIVIDENDS AND OTHER RESTRICTIONS
- --------------------------------------------------------------------------------
Certain restrictions, including capital requirements, exist on the
availability of undistributed net profits of the Bank for the future payment of
dividends to the 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, 2001, $9.8 million
was available for the payment of dividends.
NOTE 15: 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 $37,061,000, ($35,996,000 subject to variable rate
indices and $1,065,000 fixed rate commitments) as of December 31, 2001. Standby
letters of credit, which are not reflected in the accompanying consolidated
financial statements, totaled $13,473,000 and $12,125,000 as of December 31,
2001 and 2000, respectively. Commitments to extend credit and standby letters of
credit generally do not exceed one year. These financial instruments involve, to
varying degrees, elements of credit risk in excess of the amounts recognized in
the consolidated financial statements. The commitment or contract amount of
these financial instruments is an indicator of the Corporation's level of
involvement in each type of instrument as well as the exposure to credit loss in
the event of non-performance by the other party to the financial instrument. The
Corporation controls credit risk of these financial instruments through credit
approvals, limits and monitoring procedures. To minimize potential credit risk
the Corporation generally requires collateral
60
and other credit-related terms and conditions from the customer. In the opinion
of management, the financial condition of the Corporation will not be materially
affected by the final outcome of these commitments and contingent liabilities.
A substantial portion of the Bank's loans is 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, 2001, 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, 2001, the Planning Board of the Town of Morristown
approved the Corporations' plans for construction of the new branch. Through
December 31, 2001, the Corporation has recorded approximately $755,000 for land
and progress payments of $695,000 for building construction and $104,000 for
furniture and equipment related to the new branch.
Non-interest expenses include rentals for premises and equipment of
$371,493 in 2001, $357,645 in 2000 and $325,765 in 1999. At December 31, 2001,
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 2002 through 2006 are $378,547, $388,030, $398,001, $408,492 and
$419,520 respectively. Minimum rentals due 2007 and after are $644,449.
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, results of operations, or liquidity of the
Corporation.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 16: QUARTERLY FINANCIAL INFORMATION CENTER BANCORP, INC., (UNAUDITED)
- --------------------------------------------------------------------------------
2001
- ------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- ------------------------------------------------------------------------------------------------
Total interest income $ 9,692 $ 9,438 $ 9,602 $ 9,637
Total interest expense 3,575 3,830 4,214 4,388
Net interest income 6,117 5,608 5,388 5,249
Provision for loan losses 142 256 183 75
Other income 646 629 689 524
Other expense 4,092 3,761 3,711 3,652
Income before income taxes 2,529 2,220 2,183 2,046
Net income 1,761 1,495 1,400 1,355
Earnings per share:
Basic $ 0.45 $ 0.38 $ 0.36 $ 0.35
Diluted $ 0.44 $ 0.38 $ 0.35 $ 0.35
Weighted average common shares outstanding:
Basic 3,956,890 3,944,629 3,936,849 3,920,797
Diluted 3,992,000 3,980,698 3,969,115 3,952,806
===============================================================================================
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 $ 0.34 $ 0.32 $ 0.31 $ 0.30
Diluted $ 0.34 $ 0.31 $ 0.30 $ 0.30
Weighted average common shares outstanding:
Basic 3,910,518 3,935,296 4,015,332 3,991,678
Diluted 3,937,957 3,953,880 4,038,933 4,011,386
===============================================================================================
62
[LOGO] KPMG
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Center Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition
of Center Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, changes in stockholders' equity,
cash flows for each of the years in the three-year period ended December 31,
2001. 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 subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
-------------
Short Hills, New Jersey
January 23, 2002
63
[LOGO] Center Bancorp, Inc.
Corporate Headquarters
Center Bancorp, Inc.
2455 Morris Avenue
Union, NJ 07083
1-800-862-3683
www.centerbancorp.com
www.ucnb.com
Annual Shareholders' Meeting
The annual shareholders' meeting of Center Bancorp, Inc. will be held at
10:00 A.M. on Tuesday, April 16, 2002 at Suburban Golf Club,
1730 Morris Avenue, Union, New Jersey.
Dividend Reinvestment and Stock Purchase Plan
Center Bancorp, Inc. offers its shareholders a convenient plan to increase their
investment in the Company. Through the Dividend Reinvestment and Stock Purchase
Plan, holders of stock may have their quarterly dividends automatically
reinvested in additional common shares without brokerage fees, commissions or
service charges. Shareholders not enrolled in this plan, as well as brokers and
custodians who hold stock in Center Bancorp, Inc. may enroll in the plan by
contacting Anthony C. Weagley, Vice President and Treasurer, 1-800-862-3683.
Financial Information and Form IOK
Persons may obtain a copy, free of charge, of the Center Bancorp, Inc. 2001
Annual Report and Form 10K (excluding exhibits) as filed with the Securities
and Exchange Commission. Investors, Security Analysts and others desiring
financial information or a copy of such report should contact:
Anthony C. Weagley
Vice President and Treasurer
1-800-862-3683
Shareholder Inquiries
For information regarding your shares of common stock of Center Bancorp, Inc.,
please contact:
Anthony C. Weagley
Vice President and Treasurer
1-800-862-3683
Stock Listing
NASDAQ Stock Market - CNBC
Center Bancorp, Inc. Common Stock is traded on the NASDAQ Stock Market under the
Symbol CNBC. Daily stock quotes appear in some newspapers under: CtrBcp,
CenterBc, and CenterBcp.
Registrar and Transfer Agent
American Stock Transfer and Trust Co.
40 Wall Street
New York, NY 10005
64