PORTRAITS IN
COMMUNITY
BANKING
ANNUAL REPORT 2002
AT UNION CENTER NATIONAL BANK, WE'RE PROUD OF OUR LONG-STANDING TRADITION OF
PROVIDING QUALITY CUSTOMER SERVICE TO AN EVER-GROWING FAMILY OF RETAIL AND
COMMERCIAL CUSTOMERS THAT LOOK TO US FOR SOUND FINANCIAL ADVICE AND FOR HELP IN
GROWING THEIR BUSINESSES.
ON THE PAGES THAT FOLLOW YOU CAN READ ABOUT JUST A FEW OF THE MANY BUSINESSES
THAT HAVE CHOSEN UNION CENTER NATIONAL BANK AS A TRUSTED FINANCIAL PARTNER.
Financial Highlights 1
To Our Shareholders, Customers
and Friends 2
Customer Showcase 6
Town Hall Banking Center 12
Management 14
Summary of Selected Statistical
Information and Financial Data 19
Management's Discussion and Analysis 20
Consolidated Statements of Condition 42
Consolidated Statements of Income 43
Consolidated Statements of Changes in
Stockholders' Equity 44
Consolidated Statements of Cash Flows 45
Notes to Consolidated Financial
Statements 46
Independent Auditors' Report 65
Stockholders' Information 66
Locations Inside back cover
Our newest branch opened in Morristown in 2002, see page 12.
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 CHANGE
Earnings
Net Interest Income $ 25,947 $22,362 16.03
Provision for Loan Losses 360 656 (45.12)
Other Income 2,743 2,307 18.90
Gain on Securities Sold 592 181 227.07
Other Expenses 17,198 15,216 13.03
Net Income 8,003 6,011 33.14
Cash Dividends Declared $ 2,747 $ 2,338 17.49
Per Share Data
Net Income
Basic $ 1.91 $ 1.45 31.72
Diluted 1.89 1.44 31.25
Cash Dividends Paid 0.65 0.56 16.07
Book Value 12.13 10.64 14.00
Tangible Book Value $ 11.63 $ 10.14 14.69
At Year End:
Market Value Bid Ask Bid Ask
Per common share $23.10 $23.60 $18.05 $18.10
At Year End:
Investment Securities $537,619 $417,274 28.84
Loans 229,051 211,236 8.43
Assets 823,436 689,603 19.41
Deposits 616,351 497,833 23.81
FHLB advances 65,000 60,000 8.33
Federal funds purchased and securities sold
under agreements to repurchase 75,431 72,296 4.34
Stockholders' Equity $ 51,054 $44,296 15.26
Shares Outstanding 4,210,355 4,162,885 1.14
Financial Ratios
Return on average assets 1.07% 0.99%
Return on average stockholders' equity 16.58% 14.08%
Return on tangible average stockholders' equity 17.33% 14.86%
Cash dividend declared as a
percent of Net Income 34.33% 38.90%
Average stockholders' equity as a percent of average
total assets 6.46% 7.02%
Tangible average stockholders' equity as a
percent of average total assets 6.18% 6.70%
Stockholders' equity as a percent of total assets 6.20% 6.42%
Tangible stockholders' equity as a percent of total 5.95% 6.14%
assets
Average Risk Based Tier I Capital Ratio 12.20% 12.37%
Average Risk Based Tier I and Tier II Capital 12.73% 13.17%
Tier I Leverage Ratio 7.29% 7.77%
Center Bancorp, Inc.
TO SHAREHOLDERS, CUSTOMERS AND FRIENDS
Center Bancorp, Inc., parent company to Union Center National Bank, is proud to
report a year of solid performance in 2002, despite the economic slowdown that
continued to prevail during the past year. Our ability to remain solidly
profitable and to maintain consistent earnings, even under difficult conditions,
reflects our focus on adhering to fundamentals.
FINANCIAL RESULTS
Net income for 2002 totaled $8,003,000, a 33.1% increase over the $6,011,000
earned in 2001. On a year-to-date basis, earnings per fully diluted share were
$1.89, an increase of 31.3% over $1.44 for 2001. All common share and per share
amounts have been restated to reflect the 5% common stock dividend distributed
on June 1, 2002. The Corporation continued to experience asset growth both in
the loan and the investment securities portfolios. Total assets reached a record
$823.4 million as of December 31, 2002, an increase of 19.4% from the 2001
year-end asset figure of $689.6 million. While asset quality remained sound, we
continue to monitor and manage this aspect of our portfolio and commensurate
with portfolio growth, a provision of $360,000 was made to the allowance for
loan losses.
The Bank's upward trend in deposit growth continued in 2002 when the Corporation
posted a 23.8% increase in deposits. At year-end, total deposits stood at $616.4
million, up from $497.8 million at the close of 2001. The Corporation's
expansion into Morris County and its continued success in attracting new
customers helped to fuel this growth.
Despite the slowdown experienced in the economy, loan demand remained steady,
fueled primarily by a prevailing lower interest rate environment, the Bank's
expansion into vibrant new markets, and aggressive marketing of its credit
product lines.
2002 HIGHLIGHTS
In 2002, we laid the groundwork for a new strategic alliance and formed Center
Insurance and Investment Advisors, LLC. By marketing a variety of insurance and
investment services to our customers, this wholly owned subsidiary of Union
Center National Bank is postitioned to enhance non-interest revenue for the
Corporation. It is scheduled to become fully operational in 2003.
In May 2002, the Corporation opened a full-service Banking Center at 214 South
Street in Morristown, New Jersey. Management views the opening of this
2
JOHN J. DAVIS ALEXANDER A. BOL
President and Chief Executive Officer Chairman of the Board
3
new site, the Corporation's third location in Morris County, as the most
successful branch opening in our history. In terms of facility improvements, in
2002 the Corporation completed a comprehensive interior and exterior renovation
of the Bonnel Court Auto Banking Center in Union. This upgrade includes an
additional ATM drive-up lane. We also began to develop plans for a major
renovation of our Center office, located at 2003 Morris Avenue in Union, that
will be completed in 2003.
INNOVATIVE PRODUCTS AND ENHANCED TECHNOLOGIES
ARE KEY SUCCESS FACTORS
Over the years, we have not lost sight of the fact that success is largely won
through innovation and responsiveness. In 2002, we introduced several new
products including the Step-Up CD, a new certificate of deposit that features
rate increases every six months for 36 months. For businesses, we launched The
UCNB Reserve Sweep, a new FDIC-insured Money Market Investment Account that
automatically "sweeps" excess funds from a Union Center National Bank business
checking account into an investment type account. This service enables
businesses to keep excess cash invested at all times, maximizing interest yield
potential. To demonstrate our commitment to the retail lending market and
enhance loan growth, we restructured our mortgage and consumer lending functions
and marketed several loan programs in 2002, including a 10-year amortizing
mortgage and a highly competitive home equity loan offering.
In striving to meet our objective of creating and maintaining a competitive and
technologically advanced product line in 2002, we continued with our investment
in new technologies. Preparations were made in 2002 for the upgrading of our
mainframe, which will become operational in February 2003. We also upgraded our
lockbox services to include electronic and internet capabilities
SUCCESS STARTS WITH PEOPLE AND WE BELIEVE WE HAVE THE BEST
Our people drive our success and the seamless teamwork between customer contact
individuals and those responsible for internal support functions are central to
our way of doing business. During 2002, we continued to build a responsive sales
and service culture within the Bank, utilizing highly regarded best practices in
training, customer service, and performance management. Our successes during the
year were the direct result of the knowledge, experience, and enthusiasm of our
associates, the guidance and hard work of our directors, and the investment and
trust of our shareholders and customers.
4
In November, we welcomed our newest director, Eugene V. Malinowski. Mr
Malinowski is a Certified Public Accountant Consultant who brings almost 40
years of accounting experience to the Corporation, including a 25-year
distinguished career with KPMG, LLP. He is a past president of the New Jersey
Society of CPAs.
EACH NEW YEAR BRINGS NEW OPPORTUNITIES AND CHALLENGES
Customers who seek stability in their banking relationships, access to decision
makers, and highly personalized service are increasingly turning to community
banks like our own. In the pages that follow, several of those customers talk
about their experiences with Union Center National Bank and the value it creates
for their businesses. In 2003, we will celebrate eighty years of providing
quality financial services to our customers and our communities. We begin this
year knowing that the ongoing trend of mergers in banking creates significant
opportunities for Union Center National Bank. To that end, we will continue to
focus on leveraging those opportunities and on strengthening our franchise.
While we are mindful of the challenges and uncertainties that lie ahead, we
remain confident that we have the commitment, the expertise, and the drive to
succeed in the coming years.
In closing, we thank you for the confidence and loyalty you have placed in us
and we pledge to continue to earn your respect.
JOHN J. DAVIS ALEXANDER A. BOL
President and Chief Executive Officer Chairman of the Board
DOING BUSINESS WITH A SMILE
5
Family owned and operated since 1961, Marvic Corporation is a wholesale
manufacturer of countertops. Headquartered in Union, New Jersey, Marvic
Corporation supports kitchen dealers, lumberyards, architects, general
contractors, builders and large retail outlet stores throughout the tri-state
area.
"Through the years, we have worked very hard to establish a successful business.
In the beginning we struggled with a large bank that was too bureaucratic. That
totally changed when we were introduced to Union Center National Bank. At a
crucial time in Marvic's history, when we needed a very big commitment, we
received an immediate, positive decision from UCNB."
Al and Vicki D'Alessandro, Principals
Marvic Corporation
6
THE HIGHWAY DEALER WITH THE DIFFERENCE
The Multi Automotive Group, consisting of Multi Chevrolet, Saturn of Union and
Saturn of Green Brook, has been family owned and operated since 1969. This
active family ownership is what has helped the Multi Automotive Group satisfy
the needs of over 30,000 customers. The Automotive Group prides itself on
customer satisfaction always making customers' concerns their foremost priority.
"Union Center National Bank has been there for us since the very first day we
opened our doors. We share the same commitment to excellence in service and the
ability to provide that personal touch to every customer."
James Tino, Jr. and James Tino, Sr., Principals
Multi Automotive Group
7
SERVING OUR CLIENTS' BEST INTEREST
Located on Morris Avenue in Union, New Jersey, The Waldor Agency has been family
owned and operated since 1959. A comprehensive insurance agency, providing bonds
and insurance in New Jersey and nationally, The Waldor Agency stresses the
importance of personal service and customer relations.
"We have come to expect courteous, professional and responsive service from
Union Center National Bank for over 40 years. It has been an outstanding
relationship."
Marc Waldor, Secretary and Treasurer, Jerome Waldor, President, and
Jeff Kane, Vice President
Waldor Agency
8
WHERE THE CUSTOMER MATTERS MOST
Maplecrest Auto Group provides retail sales and service for new and certified
pre-owned Lincoln, Mercury and Ford vehicles at their Union, Summit and Mendham,
New Jersey locations. Winner of the Prestigious President's Award for Customer
Service, Maplecrest Auto Group is rated in the Top 10 Lincoln Mercury
Dealerships in the country for customer satisfaction. Family owned and operated
since 1963, Maplecrest is committed to forming quality relationships within the
communities they serve.
"Union Center National Bank and Maplecrest are a perfect fit, as we both realize
that superior customer service is the backbone of our organizations. We value
our long term relationship with the Bank's personnel as well as the value of
their products."
Thomas and Steven Giordano, Dealer Principals
Maplecrest Auto Group
9
RIDE WITH RIDER
Founded by Harry Bleiwise over 25 years ago, Rider Insurance Company is the
largest provider of motorcycle insurance policies in the State of New Jersey.
Integrity and reputation are the key factors Rider uses when establishing
relationships with the motorcycle community out of their Springfield, New Jersey
office. Rider believes that developing close relationships based on efficient,
friendly and reliable customer service is the foundation for long-term success.
"Union Center National Bank holds customer service up to the same high standard
that Rider does. We look forward to a long happy relationship."
Charles Bleiwise, Owner and Vice President and
Charles Lally, President
Rider Insurance Company
10
SHOP WHERE THE PROS SHOP!
Jaeger Lumber has been serving builders, remodlers and homeowners for over 60
years. Like Union Center National Bank, Jaeger Lumber focuses on meeting the
individual needs of each customer. Jaeger Lumber is a family owned company of
six stores in New Jersey with corporate offices located in Union, New Jersey.
"It's nice to deal with bankers who know your name and are part of the community
year after year. Our relationship with Union Center National Bank has been a
wise and profitable one."
Lowell Jaeger, Owner
Jaeger Lumber
11
MORRISTOWN
Our Newest Branch
In May 2002 Union Center National Bank strengthened its presence in Morris
County with the addition of a new state-of-the-art facility located on 214 South
Street in Morristown. Situated next to Morristown Town Hall, this new 2,700
square foot office, with a full service banking lobby, internet kiosk, two
drive-thru lanes, two ATM's and parking accommodations for sixteen cars,
complements the existing walk-up facility at 84 South Street.
The positive reception received from residents of Morristown and the surrounding
communities was evident in the overwhelming success of the Grand Opening
celebration. Using the Bank's trademark style of community banking, the Town
Hall Banking Center's deposit and loan portfolios continue to increase steadily.
With two Morristown locations, the Bank is well positioned to meet the growing
financial needs of the community.
Named after its neighbor, the Morristown Town Hall Banking Center enhances the
Bank's presence in Morristown.
(Pictured left to right) Alexander A. Bol, Architect, John J. Davis, Union
Center National Bank President and CEO, John J. DeLaney, Jr., Mayor, The Town of
Morristown and Norman F. Schroeder, General Contractor break ground on the
Morristown Town Hall Banking Center.
12
Center Bancorp, Inc.
13
EUGENE V. MALINOWSKI
Eugene V. Malinowski was elected to the Board of Directors in November 2002.
Mr. Malinowski is a Certified Public Accountant Consultant. He brings almost 40
years accounting experience to the corporation, including a 25 year
distinguished career with KPMG, LLP, serving 15 years as a partner. He has
served as a council member of the American Institute of C.P.A.'s and is past
president of the New Jersey Society of C.P.A.'s.
Mr. Malinowski has been employed as Executive Vice President and Chief Financial
Officer of the former Citizens First National Bank and as Senior Vice President
and Chief Financial Officer of the former First Savings Bank of New Jersey. He
holds a B.S. in accounting from Holy Cross College and an M.B.A. in finance from
the University of Chicago
14
Center Bancorp, Inc.
BOARD OF DIRECTORS OF CENTER BANCORP, INC.
ALEXANDER A. BOL EUGENE MALINOWSKI Pictured left to right are:
Chairman of the Board Certified Public Accountant Paul Lomakin, Jr., Donald G. Kein,
Architect Consultant Eugene Malinowski, Hugo Barth, III,
Alexander A. Bol, Robert L. Bischoff,
HUGO BARTH, III HERBERT SCHILLER John J. Davis, Brenda Curtis,
Partner, Haeberle & Barth President, Foremost Manufacturing Co. William A. Thompson, Herbert
Schiller,
ROBERT L. BISCHOFF NORMAN F. SCHROEDER James J. Kennedy and Norman F.
President, Beer Import Co. President, NFS Associates, Inc. Schroeder.
BRENDA CURTIS WILLIAM A. THOMPSON
Regional Vice President Vice President, Thompson & Co.
American Cancer Society
HONORARY DIRECTORS
JOHN J. DAVIS
President and Chief Executive Officer WALLACE J. BUTLER
DONALD G. KEIN JOHN A. DEITRICH
Kein, Pollatschek and Greenstein,
Attorneys ROBERT C. MILLER
JAMES J. KENNEDY STANLEY R. SOMMER
Managing Partner,
KVI Asset Management, LLC RUDI O. WADLE, D.O.
PAUL LOMAKIN, JR. CHARLES P. WOODWARD
President, Winthrop Development Co.
15
Center Bancorp, Inc.
OFFICERS OF CENTER BANCORP, INC.
JOHN J. DAVIS JOHN F. MCGOWAN Pictured left to right are:
President and Chief Executive Officer Vice President William E. Arnold, John F. McGowan,
Lori A. Wunder, John J. Davis,
WILLIAM E. ARNOLD ANTHONY C. WEAGLEY Donald Bennetti, Mark S. Cardone,
Vice President Vice President and Treasurer Julie D'Aloia and Anthony C.
Weagley.
DONALD BENNETTI LORI A. WUNDER
Vice President Vice President
MARK S. CARDONE
Vice President
JULIE D'ALOIA
Vice President and Secretary
16
WELCOMES...
ROBERT J. BIRKAS
Vice President
FRANCES RYAN
Vice President
JASON J. SKOLNICK
Vice President
ROBERT URBAN
Assistant Vice President
RUSSELL E. HANDY, JR.
Assistant Cashier
CONGRATULATES...
REGINA M. NICHOLLS
Vice President
JOAN M. MULLEN
Assistant Vice President
SUSAN SCHWEIKER
Assistant Vice President
GOLDA FERNANDEZ
Assistant Cashier
LINDA JAVORNIK
Assistant Cashier
17
OFFICERS OF UNION CENTER NATIONAL BANK
JOHN J. DAVIS FRANCES RYAN ROBERT URBAN
President and Chief Executive Officer Vice President Assistant Vice President
WILLIAM E. ARNOLD JASON J. SKOLNICK SAUL A. BURGOS
Senior Vice President Vice President Assistant Cashier
and Senior Loan Officer
JERRY F. SMITH DEBBIE A. DAMATO
DONALD BENNETTI Vice President Assistant Cashier
Senior Vice President
RICHARD E. VLEREBOME GOLDA FERNANDEZ
MARK S. CARDONE Vice President and Auditor Assistant Cashier
Senior Vice President
SALVATORE DIRICO MICHAEL F. FLESTA
JULIE D'ALOIA Assistant Vice President Assistant Cashier
Senior Vice President and Secretary
EDWARD B. FILIPSKI DENNIS M. GROTE
JOHN F. MCGOWAN Assistant Vice President Assistant Cashier
Senior Vice President
LOUIS J. GIACONA RUSSELL E. HANDY, JR.
ANTHONY C. WEAGLEY Assistant Vice President Assistant Cashier
Senior Vice President and Cashier
GEORGIANNA GOLDIN LINDA JAVORNIK
LORI A. WUNDER Assistant Vice President Assistant Cashier
Senior Vice President
IRENE S. GREENMAN ANGELO LAFERRERA
MARK P. BALSAM, SR. Assistant Vice President Assistant Cashier
Vice President
JANET M. IMRICH CAMILLE L. MOSKOWITZ
ROBERT J. BIRKAS Assistant Vice President Assistant Cashier
Vice President
DAMIEN D. KANE MARK PROCINO
THOMAS E. FARLEY Assistant Vice President Assistant Cashier
Vice President
BARRY H. KEEFE CHRISTINE SPADA
CHRISTOPHER M. GOREY Assistant Vice President Assistant Cashier
Vice President ______________________
SAMUEL D. LOMBARDI General Counsel
BARBARA LIEBMAN Assistant Vice President DONALD G. KEIN, ESQ.
Vice President
JOAN M. MULLEN
REGINA M. NICHOLLS Assistant Vice President
Vice President
SUSAN SCHWEIKER
RICHARD J. NOWEL Assistant Vice President
Vice President
WILLARD H. THOMAS
FRANCIS PATRYN Assistant Vice President
Vice President and Comptroller
18
CENTER BANCORP, INC. SUMMARY OF SELECTED STATISTICAL INFORMATION
AND FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
Summary of Income
Interest income $40,469 $38,369 $ 35,655 $ 32,092 $30,686
Interest expense 14,522 16,007 16,183 12,801 13,573
Net interest income 25,947 22,362 19,472 19,291 17,113
Provision for loan losses 360 656 363 108 120
Net interest income after provision
for loan losses 25,587 21,706 19,109 19,183 16,993
Other income 3,335 2,488 1,633 1,089 971
Other expense 17,198 15,216 13,347 13,290 11,651
Income before income tax expense 11,724 8,978 7,395 6,982 6,313
Income tax expense 3,721 2,967 2,390 2,353 2,141
Net income $ 8,003 $ 6,011 $ 5,005 $ 4,629 $ 4,172
Statement of Financial Condition Data
Investments $537,619 $417,274 $330,267 $303,940 $287,966
Total loans 229,051 211,236 198,949 169,089 150,099
Total assets 823,436 689,603 569,553 509,624 470,134
Deposits 616,351 497,833 425,296 389,255 377,167
Stockholders' equity $51,054 $44,296 $39,182 $36,513 $36,631
Dividends
Cash dividends $ 2,747 $ 2,338 $ 2,265 $ 2,213 $ 2,023
Dividend payout ratio 34.3% 38.9% 45.3% 47.8% 48.5%
Cash Dividends Per Share
Cash dividends $ 0.65 $ 0.56 $ 0.54 $ 0.52 $ 0.48
Earnings Per Share
Basic $ 1.91 $ 1.45 $ 1.20 $ 1.11 $ 1.01
Diluted $ 1.89 $ 1.44 $ 1.20 $ 1.10 $ 1.00
Weighted Average Common Shares Outstanding
Basic 4,196,741 4,136,782 4,161,366 4,162,870 4,124,980
Diluted 4,230,482 4,171,258 4,183,241 4,189,147 4,164,573
Operating Ratios
Return on average assets 1.07% 0.99% 0.94% 0.92% 0.88%
Return on tangible average equity 17.33% 14.86% 14.43% 13.50% 12.93%
Book Value
Book value per common share $ 12.13 $ 10.64 $ 9.54 $ 8.73 $ 8.84
Tangible book value per common share $ 11.63 $ 10.14 $ 8.95 $ 8.07 $ 8.10
Non-Financial Information
Common stockholders 542 543 581 603 606
Staff--Full time equivalent 182 172 156 162 153
Footnote: All per share amounts have been adjusted retroactively for stock splits and stock dividends during the
periods presented.
19
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 2002.
Center Bancorp, Inc. reported record earnings for the year, 2002. Earnings
performance remained strong notwithstanding an economic downturn, contraction of
net interest margins and an increase of 13.0 percent in operating overhead. The
increased operating overhead was primarily related to salary and benefit expense
associated with the continued expansion of the Corporation's franchise.
For the year ended December 31, 2002, net income increased 33.1% to
$8,003,000 or $1.89 per diluted share, as compared to $6,011,000 or $1.44 per
diluted share earned for the year ended December 31, 2001. Strong
interest-earning asset growth in both the loan and the taxable investment
security portfolios helped to mitigate some effects of interest rate pressure,
with loans at December 31, 2002 increasing $17.8 million (up 8.4% percent) over
the prior year-end and the investment securities portfolio increasing $120.3
million (up 28.8% over the prior year end) at year end. The loan growth has been
fueled by strong demand for commercial and residential mortgage loans. A strong
commercial real estate and residential housing market prevailed throughout the
year in New Jersey, despite the economic downturn at both the state and national
levels.
While asset quality continues to remain high and credit culture
conservative, during 2002, a total of $360,000 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 real estate loans. At December 31, 2002 the total allowance for loan
and lease losses amounted to 1.09 percent of total loans.
The geographic expansion of the Corporation into desirable markets, such as
Summit, New Jersey and into Morris County with the addition of branches in
Madison and Morristown, New Jersey, has contributed to the increased loan demand
and growth in deposits. The Corporation opened its newest "Townhall Banking
Center" in Morristown on May 1, 2002. The increased size of the securities
portfolio largely reflects the Corporation's leverage strategies and general
growth in the Corporation's balance sheet during 2002.
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. At December 31, 2002, total deposits for the Corporation were $616.4
million. Non-interest bearing core deposits, a low-cost source of funding,
continue to remain a key-funding source. At December 31, 2002, this source of
funding amounted to $117.0 million or 15.3% of total funding sources and 19.0%
of total deposits. For the year 2002 average interest-earning assets grew $125.8
million or 22.2% and interest-bearing liabilities increased on average $117.3
million.
Non-interest revenue generation increased 34.0% in 2002 and increased as a
percentage of total revenue. The increase in this revenue for 2002 was primarily
attributable to gains on securities sold and increased other income resulted
primarily from an increase in the cash surrender value of bank owned life
insurance. For the year 2002, non-interest income, exclusive of gains on
securities sold of $592,000, increased 18.9% or $436,000 as compared to 2001.
Consistent levels of service charges commissions and fees supported by increased
customer activity resulted in increased ATM and debit card fees. The Corporation
intends to expand its ATM network in 2003, which should increase ATM fees in
2003. The Corporation also perceives additional fee income opportunities in
aggressively marketing its PC Banking service, Electronic Fund Transfer
services, debit cards, lockbox and merchant processing services and investments
and insurance products (through a strategic partnership). In the fourth quarter
of 2002 the Corporation initiated the formation of its own insurance and
investment subsidiary, which it anticipates completing in the first quarter of
2003. This action will be part of the Corporation's efforts to continue to
increase non-interest revenue.
Operating expenses for the year increased 13.0% with increased salary,
benefits, and bank premise and occupancy expense accounting for most of the
increase.
Total assets at December 31, 2002, were $823.4 million, an increase of
19.4% from assets of $689.6 million at December 31, 2001. Annualized returns on
average assets for the year ended December 31, 2002 was 1.07% compared to .99%
for 2001.
20
Total stockholders' equity increased 15.3% over 2001 to $51.1 million, and
represented 6.20% of total assets at year-end. Book value per common share was
$12.13, as compared with $10.64 a year ago. Tangible book value per common share
increased to $11.63 from $10.14 a year ago. Annualized return on average
stockholders' equity for the year ended December 31, 2002 was 16.6% compared to
14.1% for 2001. This increase in return was attributable in part, to the
Corporation's issuance of $10.0 million in floating rate Capital Trust Preferred
Securities, that provided the Corporation with a higher available Tier 1 capital
level to leverage the balance sheet and subsequently contributing to the
increased earnings return on average stockholder's equity. 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 and was 7.29 percent at December 31, 2002.
A key element of the Corporation's consistent performance is its strong
capital base. The Corporation's risk-based capital ratios at December 31, 2002
were 12.20 percent for Tier I capital and 12.73 percent for total risk-based
capital. These ratios substantially exceed the regulatory 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 17.3 percent in 2002, compared with 14.9 percent for 2001 and 14.4 percent
in 2000.
The Corporation announced a common stock buyback program on January 24,
2002, under which the Corporation was authorized to purchase up to 120,750
shares (restated to reflect the 5 percent common stock dividend distributed on
June 1, 2002) of the Corporation's outstanding common stock over the next year.
Under the program repurchases may be made from time to time as, in the opinion
of management, market conditions warrant, in the open market or in privately
negotiated transactions. As of December 31, 2002 the Corporation had repurchased
26,000 shares under the program at an average cost of $20.68 per share.
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, origination volume, the impact of
competition and 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.
21
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS CONTINUED
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 33.14
percent, 31.72 percent and 31.25 percent, respectively, for the year ended
December 31, 2002, compared to the year ended December 31, 2001. This compared
to increases of 20.10 percent, 21.43 percent and 19.84 percent, respectively,
for the year ended December 31, 2001, as compared to the year ended December 31,
2000. Net income for the year ended December 31, 2002 was $8,003,000 as compared
to $6,011,000 earned for the comparable year of 2001 and $5,005,000 for the
comparable year of 2000. All common share and per share information for all
periods presented have been retroactively restated for common stock splits and
common stock dividends distributed to common stockholders during the periods
presented.
The annualized return on average assets was 1.07 percent for the year ended
December 31, 2002 as compared with 0.99 percent for the comparable period in
2001, and 0.94 percent for the comparable period in 2000, while the annualized
return on tangible average stockholders' equity was 17.33 percent, 14.86 percent
and 14.43 percent, respectively.
Earnings performance for the year ended December 31, 2002, reflected
continued adherence to the Corporation's strategic initiatives. These
initiatives are designed to sharpen our business focus and strengthen our
financial performance emphasizing the importance of core relationship business
and a conservative credit culture. Earnings for the year was fueled by a higher
level of interest-earning assets coupled with a double-digit percentage gain in
non-interest revenue. This increase in revenue was offset in part by an increase
in non-interest expense and in the provisions for taxes and a contraction of the
net interest margin.
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 borrowings, which support these assets. There were several factors
that affected net interest income during 2002 including: the volume, pricing,
mix and maturity of earning assets and interest-bearing liabilities and interest
rate fluctuations.
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.
22
The following table presents the components of net interest income (on a
tax-equivalent basis) for the past three years.
2002 2001 2000
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
FROM FROM FROM
PRIOR PERCENT PRIOR PERCENT PRIOR PERCENT
(DOLLARS IN THOUSANDS) AMOUNT YEAR CHANGE AMOUNT YEAR CHANGE AMOUNT YEAR CHANGE
INTEREST INCOME:
Investments $25,853 $2,858 12.43 $22,995 $1,714 8.05 $21,281 $1,398 7.03
Loans, including fees 14,880 (421) (2.75) 15,301 894 6.21 14,407 2,209 18.11
Federal funds sold and
securities
purchased under
agreement to
resell 59 (272) (82.18) 331 (45) (11.97) 376 (76) (16.81)
Total interest income 40,792 2,165 5.60 38,627 2,563 7.11 36,064 3,531 10.85
Interest expense:
Certificates $100,000 or 472 (993) (67.78) 1,465 (2,017) (57.93) 3,482 779 28.82
more
Deposits 8,749 (467) (5.07) 9,216 454 5.18 8,762 1,452 19.86
Borrowings 5,301 (25) (0.47) 5,326 1,387 35.21 3,939 1,151 41.28
Total interest expense 14,522 (1,485) (9.28) 16,007 (176) (1.09) 3,382 26.42
16,183
Net interest income on a
fully
tax-equivalent basis $26,270 $3,650 16.14 $2,739 13.78 $ 149 0.76
$22,620 $19,881
Tax-equivalent adjustment (323) 65 25.19 (258) 151 (36.92) (409) 32 (7.30)
Net interest income * $25,947 $3,585 16.03 $22,362 $2,890 14.84 $19,472 $181 0.94
* Before the provision for loan losses
NOTE: The tax-equivalent adjustment was computed based on an assumed statutory
Federal income tax rate of 34 percent. Adjustments were made for interest earned
on securities of state and political subdivisions.
NET INTEREST INCOME
Net interest income on a fully tax-equivalent basis for the year ended
December 31, 2002 increased $3.65 million or 16.14 percent, from $22.6 million
for the comparable twelve-month period in 2001. The Corporation's net interest
margin decreased 20 basis points to 3.80 percent from 4.00 percent.
The change in net interest income was primarily attributable to the
increased volume of interest-earning assets, an increase of $125.8 million. A 95
basis point decline in the average interest rates paid on total interest-bearing
liabilities was offset in substantial part by a 92 basis point decrease in the
average yield on interest-earning assets from 6.82 percent in 2001 to 5.90
percent for the year ended December 31, 2002. The change in average yield on
both interest-earning assets and interest-bearing liabilities reflected the
decline in interest rates that prevailed throughout 2002 and 2001.
For the year ended December 31, 2002, interest-earning assets increased by
$125.8 million on average to $691.8 million, as compared with a $566.0 million
average volume for the year ended December 31, 2001. The 2002 change in average
interest-earning asset volume was primarily due to increased volumes of taxable
investments and loans and were funded in part with more expensive
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 this page and on pages 24 and 41, each of
which have been presented on a tax-equivalent basis (assuming a 34 percent tax
rate). The table on page 41 (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
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
2002/2001 2001/2000
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
CHANGE IN: CHANGE IN:
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
Interest-earning assets:
Investment securities:
Taxable $6,389 $(3,722) $2,667 $3,423 $(1,266) $2,157
Non-Taxable 189 2 191 (431) (12) (443)
Federal funds sold and securities
purchased under agreement to resell (118) (154) (272) 49 (94) (45)
Loans, net of unearned discounts 1,194 (1,615) (421) 1,515 (621) 894
Total interest-earning assets 7,654 (5,489) 2,165 4,556 (1,993) 2,563
Interest-bearing liabilities:
Money market deposits 405 (649) (244) 94 (543) (449)
Savings deposits 1,221 (1,157) 64 803 (63) 740
Time deposits 222 (1,533) (1,311) (881) (839) (1,720)
Other interest-bearing deposits 198 (167) 31 51 (185) (134)
Borrowings 1,247 (1,272) (25) 2,016 (629) 1,387
Total interest-bearing liabilities 3,293 (4,778) (1,485) 2,083 (2,259) (176)
Change in net
interest income $4,361 $ (711) $3,650 $2,473 $266 $ 2,739
Interest income on a fully tax-equivalent basis for the year ended December
31, 2002 increased by approximately $2.2 million or 5.60 percent, versus the
comparable period ended December 31, 2001. The primary factor contributing to
the increase was the growth of interest-earning assets, primarily taxable
investment securities and loans. The Corporation's loan portfolio increased on
average $16.8 million to $222.8 million from $206.0 million in 2001. This growth
was primarily driven by growth in commercial mortgage 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 32.2
percent and 36.4 percent of the Corporation's interest-earning assets on average
for the years ended December 31, 2002 and 2001, respectively.
Within the investment portfolio, the average volume in 2002 in taxable
securities increased by $109.6 million while the non-taxable portfolio increased
by $2.7 million as compared to 2001.
Interest income (tax-equivalent) increased by $2.6 million from 2000 to
2001 primarily due to an increase in interest-earning assets.
Interest expense for the year ended December 31, 2002 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 year ended December 31, 2002, interest expense decreased $1.5 million or
9.28 percent as compared with the comparable year in 2001. Interest-bearing
liabilities increased on average $117.3 million, primarily in savings and
short-term borrowings. The decline in average rates contributed $4.8 million to
the change in cost, offset in part by a $3.3 million increase in cost of funds
due to an increase in the average volume of interest-bearing liabilities.
24
During 2001, interest expense decreased $176,000, as compared with the year
2000, reflecting a decrease 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
three basis points to 3.40 percent from 3.37 percent for the year ended December
31, 2001. The increase reflected a contraction of spreads between yields earned
on loans and investments and rates paid for supporting funds. During 2002
spreads widened due in part to monetary policy promulgated by the Federal
Reserve Open Market Committee maintaining the target Federal Funds Rate at a
40-year low of 1.25 percent as a result of its last rate cut on November 6,
2002. The Federal Reserve had lowered rates one time during 2002 for a total of
50 basis points in comparison to 2001 when the Fed lowered rates 11 times for a
total of 475 basis points. The net interest spread increased 15 basis points in
2001 as compared with 2000, primarily as a result of the decreased cost of
interest-bearing liabilities. The years 2001 and 2002 generally reflected
periods of falling interest rates.
The total cost of interest-bearing liabilities decreased to 2.50 percent, a
change of 95 basis points, for the year ended December 31, 2002, from 3.45
percent for the year ended December 31, 2001 and a change of 150 basis points
from 4.00 percent for the year ended December 31, 2000.
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 18 basis points during 2002 to
approximately 40 basis points on average as compared to 58 basis points on
average during the year ended December 31, 2001. During the comparable periods
of 2001 and 2000, there was a decrease of 14 basis points to 58 basis points on
average. The increased percentage of non-interest bearing funding sources in
2002 was primarily attributable to increased commercial business related
deposits, which also increased as percentage of the total demand deposit funding
base.
INVESTMENTS
For the year ended December 31, 2002, the average volume of investment
securities increased by $112.3 million to $465.6 million, or 67.3 percent of
earning-assets, as compared to $353.2 million or 62.4 percent for the year ended
December 31, 2001. The tax-equivalent yield on investments decreased to 5.55
percent or 96 basis points from a yield of 6.51 percent during the year ended
December 31, 2001. The volume related factors during the period, contributed
increased interest revenue of $6.6 million while rate related changes amounted
to a decline in interest income of $3.7 million. The yield on the investment
portfolio during 2002 was impacted by the low interest rate environment which
resulted in the purchase of lower coupon mortgage-backed securities to replace,
in certain cases, high yielding investments, which had matured, were prepaid, or
were called. Additionally, increased volumes of investments in overnight
institutional money market funds, which are carried as part of the investment
portfolio, versus federal funds or overnight repurchase agreements due to more
favorable rates available for liquid overnight funds, contributed to the reduced
yield on the investment portfolio in comparison to 2001.
The impact of repricing activity on investment yields, as a result of lower
interest rates, increased during the latter part of 2002 as mortgage related
prepayment activity increased attributable to re-financing activity of homes
which reached historical proportions as interest rates fell to 40 year lows.
Some of the impact on yield 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; however, the Corporation was not able
to totally mitigate the effects of the prepayment activity which resulted in a
decline in portfolio yield. 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. During 2002 approximately $44.3 million in securities were
sold from the Corporation's available-for-sale portfolio.
25
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS CONTINUED
At December 31, 2002, the total investment portfolio excluding overnight
investments was $537.6 million, an increase of $120.4 million from December 31,
2001. The increased size of the investment portfolio largely reflects the
implementation of the Corporation's leverage strategies initiated in the fourth
quarter of 2001, which reflected the addition of approximately $71.5 million in
mortgage-backed securities to the balance sheet and the general growth of this
component of earning-assets commensurate with the overall growth of the
Corporation's balance sheet and insufficient loan growth to absorb this growth.
The principal components of the investment portfolio are U.S. Government Federal
Agency callable and non-callable securities, including agency issued
collateralized mortgage obligations, corporate securities, and municipals.
At December 31, 2002 the net unrealized gain carried as a component of
other comprehensive income and included in shareholders' equity net of tax
amounted to a net unrealized gain of $2.2 million as compared with an unrealized
net gain of $1.1 million at December 31, 2001, resulting from a decline in
interest rates.
For additional information regarding the Corporation's investment
portfolio, see Note 4 to the Consolidated Financial Statements.
LOANS
Loan growth during 2002 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 year 2002
was the result of a further decline in interest rates. 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.
Average loan volume increased $16.8 million or 8.17 percent in 2002, while
portfolio yield decreased by 75 basis points as compared with the same period in
2001. 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 $1,194,000, offset in
part by rate related changes, which amounted to $1,615,000. Total average loan
volume increased to $222.8 million with a net interest yield of 6.68 percent, as
compared to $206.0 million with a yield of 7.43 percent for the year ended
December 31, 2001. 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 2002, the level of the
allowance was $2,498,000 as compared to a level of $2,191,000 at December 31,
2001. The Corporation made a provision to the allowance for loan losses of
$360,000 in 2002, $656,000 in 2001 and $363,000 in 2000. The decrease in the
provision for loan losses during 2002 was commensurate with the modest increase
in the loan volume recorded during the year, lower net charge-offs, and the
overall level of the allowance as a percentage of total loans.
26
At December 31,2002, the allowance for loan losses amounted to 1.09 percent
of total loans. In management's view, the level of the allowance at December 31,
2002 is adequate to cover losses inherent in the loan portfolio. Management's
judgment regarding the adequacy of the allowance constitutes a "Forward Looking
Statement" under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from management's analysis, based principally
upon the factors considered by management in establishing the allowance.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's allowance
for loan losses. Such agencies may require the Corporation to increase the
allowance based on their analysis of information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions beyond the Corporation's control. The allowance for loan losses as a
percentage of total loans amounted to 1.09 percent, 1.04 percent and 0.83
percent at December 31, 2002, 2001 and 2000, respectively.
During 2002, the Corporation did not experience any substantial problems
within its loan portfolio. Net charge-offs were $53,000 in 2002, $120,000 in
2001 and $131,000 in 2000. During 2002, the Corporation experienced a reduction
in the volume of charge-offs in the installment loan portfolio compared to 2001
and 2000 levels. The unfavorable trend in the level of charge-offs in 2000 and
2001 was attributed to the economic slow-down and the resulting higher level of
personal bankruptcies.
The Corporation had non-accrual loans amounting to $229,000 at December 31,
2002, $109,000 at December 31, 2001 and $246,000 at December 31, 2000. The
increase in non-accrual loans for 2002 was attributable to an increase in
non-accrual fixed rate home equity loans, and personal loans, as compared to
December 31, 2001. The Corporation continues to pursue aggressively collections
of principal and interest on loans previously charged-off.
The value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or at the fair value
of the collateral if the loan is collateral dependent. Impaired loans consist of
non-accrual loans and loans internally classified as substandard or below, in
each instance above an established dollar threshold of $200,000. All loans below
the established dollar threshold are considered homogenous and are collectively
evaluated for impairment. At December 31, 2002, total impaired loans amounted to
$175,000 compared with $1,859,000 at December 31, 2001, and $1,464,000 at
December31, 2000. The reserves allocated to such loans in 2002, 2001 and 2000
were $1,000, $279,000 and $146,000, respectively. Although classified as
substandard, the impaired loans were current with respect to principal and
interest payments.
27
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS CONTINUED
FIVE YEAR STATISTICAL ALLOWANCE FOR LOAN LOSSES
The following table reflects the relationship of loan volume, the provision
and allowance for loan losses and net charge-offs for the past five years.
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000 1999 1998
Average loans outstanding $222,819 $205,991 $185,846 $160,208 $138,967
Total loans at end of period $229,051 $211,236 $198,949 $169,089 $150,099
Analysis of the Allowance for Loan Losses
Balance at the beginning of year $ 2,191 $ 1,655 $ 1,423 $ 1,326 $ 1,269
Charge-offs:
Commercial 48 0 0 0 0
Installment loans 69 127 135 23 70
Total charge-offs 117 127 135 23 70
Recoveries:
Commercial 48 0 0 0 0
Installment loans 16 7 4 12 7
Total recoveries 64 7 4 12 7
Net charge-offs: 53 120 131 11 63
Provision for loan losses 360 656 363 108 120
Balance at end of year $ 2,498 $ 2,191 $ 1,655 $ 1,423 $ 1,326
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.02% 0.06% 0.07% 0.01% 0.05%
Allowance for loan losses as a percentage
of total loans at end of year 1.09% 1.04% 0.83% 0.84% 0.88%
The 2002 and 2001 charge-offs of $69,000 and $127,000, respectively, in
installment loans were attributed to the economic slow-down and 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.
28
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) 2002 2001 2000 1999 1998
Non-accrual loans $229 $109 $246 $292 $41
Accruing loans past due 90 days or more 0 8 2 0 24
Other real estate owned 0 0 49 73 73
Total non-performing assets $229 $117 $297 $365 $138
Non-accrual loans at December 31, 2002 increased $120,000 from the amount
reported at December 31, 2001. The increase in non-accrual loans at December 31,
2002 was attributable to an increase of $209,000 and $20,000 in non-accrual
fixed rate home equity loans, and personal loans, respectively as compared to
December 31, 2001 which included a $84,000 commercial loan and a $25,000
residential mortgage loan.
At December 31, 2002, total impaired loans amounted to $175,000 compared
with $1,859,000 at December 31, 2001; and $1,464,000 at December 31, 2000. The
decline in impaired loans at December 31, 2002 as compared with 2001 is
attributable to an upgrade in rating from substandard to pass/watch of two
related commercial real estate credits due to improved borrower profitability
and stronger cash flows. Although classified as substandard, the impaired loans
were current with respect to principal and interest payments.
At December 31, 2002 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, 2002 and 2001.
OREO at December 31, 2000 consisted of a two family residential property with a
carrying value of $49,000.
NON-INTEREST INCOME
Non-interest fee income continued to remain a key offset to a decline in
net interest margins in 2002. The following table presents the principal
categories of non-interest income for each of the years in the three-year period
ended December 31, 2002.
AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 % CHANGE 2001 2000 % CHANGE
Other income:
Service charges, commissions and fees $1,600 $1,560 2.56 $1,560 $1,301 19.91
Other income 1,143 747 53.01 747 410 82.20
Gain (loss) on securities sold 592 181 227.07 181 (78) N/M
Total other non-interest income $3,335 $2,488 34.04 $2,488 $1,633 52.36
For the year ended December 31, 2002, total other non-interest income,
exclusive of net gains (losses) on securities sold, reflects an increase of
$436,000 or an increase of 18.9 percent compared to the comparable year ended
December 31, 2001. This overall increase was primarily a result of the recorded
change in the net asset value of bank owned life insurance of approximately
$761,000 compared to $382,000 in prior years, which is included in other income.
Fee income, comprised of service charges commissions and fees, increased by
$40,000, attributable to higher levels of letter of credit income and increased
service charges, commissions, and fees. Service charges increased primarily as a
result of an increase in business activity and expanded customer account base.
Included in service charges for the 2000 period was non-recurring income of
$75,000 which was attributable to checkbook sales. 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.
During 2002, the Corporation recorded net gains of $592,000 on securities
sold from the available-for-sale investment portfolio compared to gains of
$181,000 and losses of $78,000 recorded in 2001 and 2000. The sales were made in
the normal course of business and proceeds were re-invested into the securities
portfolio.
29
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
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, 2002.
AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 % CHANGE 2001 2000 % CHANGE
Other non-interest expense:
Salaries and employee benefits $9,452 $7,807 21.07 $7,807 $6,800 14.81
Occupancy, net 1,644 1,509 8.95 1,509 1,340 12.61
Premises and equipment 1,600 1,486 7.67 1,486 1,453 2.27
Stationery and printing 583 468 24.57 468 432 8.33
Marketing and advertising 576 487 18.28 487 490 (0.61)
Other 3,343 3,459 (3.35) 3,459 2,832 22.14
Total other non-interest expense $17,198 $15,216 13.03 $15,216 $13,347 14.00
Total non-interest expense increased $1.982 million or 13.03 percent in
2002 as compared with an increase of $1.869 million or 14.00 percent from 2000
to 2001. The level of operating expenses during the year of 2002 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 to be a key objective of management in an effort
to improve earnings performance. The Corporation's ratio of other expenses to
average assets declined to 2.30 percent in 2002 compared to 2.50 percent in 2001
and 2000. The Corporation's efficiency ratio (defined as non-interest expenses
divided by tax-equivalent net interest income plus recurring non-interest
income) was 59.3 percent, 59.8 and 60.2 percent, respectively for 2002, 2001 and
2000.
Salaries and employee benefits, which accounted for 83.0 percent of the
total increase in other non-interest expense, increased $1.645 million or 21.1
percent in 2002 over the comparable year ended December 31, 2001. Salaries and
employee benefits accounted for 55.0 percent of total other non-interest expense
in 2002, as compared to 51.3 percent and 50.9 percent for the years 2001 and
2000, respectively. This increase is primarily 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 182 full-time equivalent employees at December 31, 2002 compared to
172 full-time equivalent employees at December 31, 2001 and 156 at December 31,
2000.
Occupancy and bank premise and equipment expenses for the year ended
December 31, 2002 increased $249,000 or 8.3 percent over 2001. This increase in
occupancy and bank premise and equipment expense in 2002 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 $202,000 or 7.2 percent in 2001 over 2000 was
also attributable to the increased costs of expanded bank facilities.
Stationery and printing expenses for the year increased ($115,000 or 24.6
percent) compared to 2001 and reflect higher costs associated with the branch
network coupled with higher business activity. These costs increased $36,000 or
8.33 percent in 2001 from 2000, reflecting the increased costs associated with
an expanded infrastructure and branch network.
Marketing and advertising expenses for the year ended December 31, 2002
increased $89,000 or 18.28 percent over the comparable twelve-month period in
2001. This increase in marketing and advertising expense in 2002 is primarily
attributable to costs associated with the grand opening of the Town Hall Banking
Center in Morristown, New Jersey and the promotion during the year of deposit
and loan products. These expenses decreased modestly in 2001 when compared with
2000 levels.
30
For the year ended December 31, 2002 total other non-interest expenses
decreased $116,000 or 3.35 percent over 2001. Decreases in expense were
attributable to reduced levels of legal and consulting expense for the year of
2002, which fell $325,000 or 47.03 percent compared to 2001 and reflect
decreased costs associated with general corporate matters, as well as costs
associated with a sales training program and EDP audit function. The increase in
such expense of $123,000 or 32.7 percent in 2001 over 2000 was due to increased
legal and consulting costs incurred in prior years connected with the formation
of a subsidiary company and the liquidation of another.
Effective January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill
and Intangible Assets"; under which annual amortization of unamortized goodwill
ceased. Accordingly there was no amortization expense for the year ended
December 31, 2002. Other operating expense, associated with amortization of
goodwill, for the comparable period in 2001 included amortization expense
amounting to $323,000 for the year ended December 31, 2001.
PROVISION FOR INCOME TAXES
The Corporation's provision for income taxes increased from 2001 to 2002,
primarily as a result of higher levels of taxable income offset in part by
increases in tax-exempt income and discontinuation of amortization expense in
2002. The effective tax rates for the Corporation for the year ended December
31, 2002, 2001 and 2000 were 31.74 percent, 33.05 percent and 32.32 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 increased by $191,000 or 25.16 percent from
2001 to 2002 and decreased by $443,000 or 36.86 percent from 2000 to 2001. The
Corporation recorded an increase in the cash surrender value of bank owned life
insurance as a component of other income in the amount of $761,000, $382,000 and
$0 for 2002, 2001 and 2000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133. AND NO. 138
On January 1, 2000, the Corporation adopted SFAS 133, "Accounting for
Derivatives and Similar Financial Instruments and for Hedging Activities" and
SFAS 138, ""Accounting for Derivatives and Similar Financial Instruments and for
Hedging Activities, an amendment of FASB Statement No. 133 and 137." The
transition provisions contained in SFAS 133 provide that at the date of initial
application, an entity may transfer any debt security classified as "held to
maturity" 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.This Statement was originally
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
31
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS CONTINUED
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 December 31, 2001 as well as all purchase method business
combinations completed after December 31, 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 December 31, 2001, and therefore the
implementation of this Statement 141 did not have an impact on the Corporation.
SFAS NO. 142
Upon adoption of Statement 142, the Corporation was required to evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination. In addition, the Corporation was 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 was identified as having an indefinite useful life, the
Corporation was required to test the tangible asset for impairment in accordance
with the provisions of Statement 142 within the first interim period. Any
impairment loss would 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 required the Corporation to perform an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. The
Corporation then had up to year 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 exits 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 was required to be completed as soon as possible, but no later
than the end of the year of adoption. Any transitional impairment loss would 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 had $2.1 million in unamortized
goodwill with annual amortization of $323,000, which ceased upon the adoption of
SFAS No. 142, "Goodwill and Intangible Assets". The Corporation adopted SFAS No.
142 on January 1, 2002. Accordingly, the December 31, 2002 Financial Statements
do not include amortization of goodwill. For the year ended December 31, 2001,
amortization of goodwill totaled $323,000. If SFAS No. 142 had been adopted on
January 1, 2000, net income for the years ended December 31, 2000 and 2001 would
have increased $323,000. Accordingly, basic and diluted earnings per share would
have increased $.08 for the years ended December 31, 2000 and 2001.
SFAS NO. 144
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many
of the fundamental provisions of that Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The initial adoption of SFAS No.
144 as of January 1, 2002, did not have a significant impact on the
Corporation's consolidated financial statements.
32
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
The Statement was issued to eliminate an inconsistency in the required
accounting for sale-leaseback transactions and certain lease modifications that
were similar to sale-leaseback transactions and to rescind FASB Statement No.
44, Accounting for Intangible Assets of Motor Carriers, as well as amending
other existing authoritative pronouncements to make various technical
corrections.
SFAS No. 145 also rescinds SFAS No. 4 Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64 Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements. Under SFAS No. 4, as amended by SFAS No. 64, gains
and losses from the extinguishment of debt were required to be classified as an
extraordinary item, if material. Under SFAS No. 145, gains or losses from the
extinguishment of debt are to be classified as a component of operating income,
rather than an extraordinary item. SFAS No. 145 is effective for fiscal years
beginning after May 16, 2002, with early adoption of the provisions related to
the rescission of SFAS No. 4 encouraged. Upon adoption, companies must
reclassify prior period amounts previously classified as an extraordinary item.
Management does not anticipate that the initial adoption of SFAS 145 will have a
significant impact on the Corporation's consolidated financial statements.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002.
SFAS NO. 147
In October, 2002, the FASB issued Statement No. 147, Acquisitions of
Certain Financial Institutions- an amendment to FASB Statements No. 72 and 144
and FASB Interpretation No. 9. This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. The provisions of Statement No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination,
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill. The provisions of
Statement No. 147 are effective October 1, 2002. The initial adoption of this
statement did not have any impact on the Corporation's consolidated financial
statements.
SFAS NO. 148
In December 2002, The Financial Accounting Standards Board (FASB) released
Statement No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure." This statement amends FASB Statement No 123, "Accounting for Stock
Based Compensation" and provides alternative methods of transition for companies
that choose to change to the fair value method of accounting for stock options.
Statement No. 148 also amends the disclosure requirements for stock-based
compensation of FASB Statement 123, regardless of the method of accounting
chosen. Under the new standard companies must disclose certain types of
information, about stock-based employee compensation, more prominently in both
the annual and interim financial statements.
The transition guidance and annual disclosure provisions of Statement 148
are effective for fiscal periods ending after December 15, 2002, with earlier
application permitted under certain circumstances. The Corporation adopted the
expanded disclosure requirements under Statement No. 148 effective December 31,
2002.
33
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.
34
The low level of interest rates necessitated a modification of the
Corporation's standard rate scenario of a shock down 200 basis points over 12
months to down 100 basis points over a 12 month period.
Based on the results of the interest simulation model as of December 31,
2002, and assuming that Management does not take action to alter the outcome,
the Corporation would expect an increase of 2.13 percent in net interest income
if interest rates decreased 100 basis points from the current rates in an
immediate and parallel shock over a 12-month period. In a rising rate
environment, based on the results of the model as of December 31, 2002, the
Corporation would expect a decrease of 5.24 percent in net interest income if
interest rates increased by 200 basis points from current rates in an immediate
and parallel shock over a twelve month period.
Short-term interest rate exposure analysis is supplemented with an interest
sensitivity gap model. The Corporation utilizes interest sensitivity analysis to
measure the responsiveness of net interest income to changes in interest rate
levels. Interest rate risk arises when an earning-asset matures or when its
interest rate changes in a time period different from that of a supporting
interest-bearing liability, or when an interest-bearing liability matures or
when its interest rate changes in a time period different from that of an
earning-asset that it supports. While the Corporation matches only a small
portion of specific assets and liabilities, total earning assets and
interest-bearing liabilities are grouped to determine the overall interest rate
risk within a number of specific time frames. The difference between interest
sensitive assets and interest sensitive liabilities is referred to as the
interest sensitivity gap. At any given point in time, the Corporation may be in
an asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities, or in a liability-sensitive position, whereby
its interest-sensitive liabilities exceed its interest-sensitive assets,
depending on management's judgment as to projected interest rate trends.
The Corporation's rate sensitivity position in each time frame may be
expressed as assets less liabilities, as liabilities less assets, or as the
ratio between rate sensitive assets (RSA) and rate sensitive liabilities (RSL).
For example, a short funded position (liabilities repricing before assets) would
be expressed as a net negative position, when period gaps are computed by
subtracting repricing liabilities from repricing assets. When using the ratio
method, a RSA/RSL ratio of 1 indicates a balanced position, a ratio greater than
1 indicates an asset sensitive position and a ratio less than 1 indicates a
liability sensitive position.
A negative gap and/or a rate sensitivity ratio less than 1, tends to expand
net interest margins in a falling rate environment and to reduce net interest
margins in a rising rate environment. Conversely, when a positive gap occurs,
generally margins expand in a rising rate environment and contract in a falling
rate environment. From time to time, the Corporation may elect to deliberately
mismatch liabilities and assets in a strategic gap position.
At December 31, 2002, the Corporation reflects a positive interest
sensitivity gap (or an interest sensitivity ratio of 1.05:1.00) at the
cumulative one-year position. During much of 2002, the Corporation had
maintained a negative interest sensitivity gap. The maintenance of a
liability-sensitive position during 2002 had a favorable impact on the
Corporation's net interest margins as interest rates declined; however, based on
management's perception that interest rates will continue to be volatile,
projected increased levels of prepayments on the earning-asset portfolio and
current level of interest rates, emphasis has been and is expected to continue
to be, placed on interest- sensitivity matching with the objective of
stabilizing the net interest spread during 2003. However, no assurance can be
given that this objective will be met.
35
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
The following table depicts the Corporation's interest rate sensitivity
position at December 31, 2002:
EXPECTED MATURITY/PRINCIPAL REPAYMENT DECEMBER 31,
AVERAGE YEAR YEAR YEAR YEAR YEAR 2008 ESTIMATED
INTEREST END END END END END AND TOTAL FAIR
(DOLLARS IN THOUSANDS) RATE 2003 2004 2005 2006 2007 THEREAFTER BALANCE VALUE
INTEREST-EARNING
ASSETS:
Loans 6.25% $99,996 $36,631 $ 26,846 $ 27,794 $13,647 $21,638 $226,552 $232,442
Investments 4.57% 292,758 108,052 46,844 24,308 15,701 49,983 537,646 542,638
$ $
Total interest-earning assets $392,754 $144,683 73,690 52,102 $29,348 $71,621 $764,198 $775,080
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$100,000 or greater 1.97% $32,586 $ 3,938 $ 516 $ 0 $ 0 $ 0 $37,040 $37,228
Time certificates of deposit of
less than $100,000 3.62% 27,873 7,875 33,420 2,526 3,637 0 75,331 78,129
Other interest bearing
deposits 1.30% 239,650 1,222 825 3 645 144,442 386,787 386,814
Trust preferred securities 5.63% 0 0 0 10,000 0 0 10,000 10,000
Securities sold under
agreements to repurchase
and FHLB advances 3.07% 75,431 0 0 0 0 65,000 140,431 149,525
Total interest-bearing
liabilities $375,540 $13,035 $ 34,761 $12,529 $ 4,282 $ 209,442 $649,589 $661,696
Cumulative interest-earning
assets 392,754 537,437 611,127 663,229 692,577 764,198 764,198
Cumulative interest-bearing
liabilities 375,540 388,575 423,336 435,865 440,147 649,589 649,589
Rate sensitivity gap 17,214 131,648 38,929 39,573 25,066 (137,821) 114,609
Cumulative rate sensitivity gap $17,214 $148,862 $187,791 $227,364 $252,430 $ 114,609 $114,609
Cumulative gap ratio 1.05% 1.38% 1.44% 1.52% 1.57% 1.18% 1.18%
The table above indicates the time period in which interest-earning
assets and interest-bearing liabilities will mature or may re-price in
accordance with their contractual terms. However, this table does not
necessarily indicate the impact of general interest rate movements on the
Corporation's net interest yield because the repricing of various
categories of assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, various assets and
liabilities indicated as repricing within the same period may in fact
re-price at different times and at different rate levels.
Expected maturities are contractual maturities adjusted for
prepayments of principal based on current market indices. The Corporation
uses certain assumptions to estimate fair values and expected maturities.
For assets, expected maturities are based upon contractual maturity,
projected repayments and prepayments of principal. For deposits,
contractual maturities are assumed for certificates of deposit while other
interest-bearing deposits were treated as if subject to immediate
withdrawal.
36
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, 2002, core deposits, as defined by the
Corporation (comprised of total demand and savings accounts plus money market
accounts under $100,000), represented 48.5 percent of total deposits. More
volatile rate sensitive deposits, concentrated in certificates of deposit
$100,000 and greater, increased to 5.4 percent of total deposits from 4.7
percent at December 31, 2001. This change was due primarily to an increase in
time deposits during 2002.
The following table depicts the Corporation's core deposit mix at December
31, 2002 and 2001:
CORE DEPOSIT MIX
DECEMBER 31,
NET CHANGE
2002 2001 VOLUME 2002
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE VS. 2001
Demand Deposits $116,984 39.1 $103,520 38.0 $13,464
Interest-Bearing Demand 82,351 27.5 79,661 28.5 2,690
Regular Savings 75,370 25.2 67,681 24.6 7,689
Money Market Deposits under $100 24,347 8.2 24,222 8.9 125
Total core deposits $299,052 100.0 $275,084 100.0 $23,968
Total deposits $616,351 $497,833 $118,518
Core deposits to total deposits 49% 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 2002 amounted to approximately $81.3
million, an increase of $21.9 million or 36.87 percent from the 2001 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) 2002 2001 2000
Securities sold under repurchase agreements:
Average Interest rate:
At year end 1.23% 2.35% 4.65%
For the year 1.63% 3.30% 4.46%
Average amount outstanding during the year: $81,297 $59,425 $35,205
Maximum amount outstanding at any month end: $85,110 $90,079 $51,262
Amount outstanding at year end: $75,431 $72,296 $51,262
37
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
CASH FLOWS
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. During 2002
cash and cash equivalents (which decreased overall by $6.4 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 property and equipment.
STOCKHOLDERS' EQUITY
Stockholders' equity averaged $48.3 million during 2002, an increase of
$5.6 million or 13.0 percent, as compared to 2001. At December 31, 2002,
stockholders' equity totaled $51.1 million, an increase of $6.8 million from
December 31, 2001. Such increase resulted from an increase of $1,064,000 of net
unrealized gains (net of tax) on securities available-for-sale and net increases
of $5,352,000 attributable to net income and issuance of common stock less cash
dividends paid. The Corporation's dividend reinvestment and optional stock
purchase plan contributed $337,000 in new capital during 2002. Book value per
share at year-end 2002 was $12.13 compared to $10.64 at year-end 2001. Tangible
book value at year-end 2002 was $11.63 compared to $10.14 for 2001.
As of December 31, 2002 the Corporation has purchased 26,000 common shares
at an average cost per share of $20.68 under the stock buyback program announced
on January 24, 2002 for the repurchase of up to 120,750 shares of the
Corporation's outstanding common stock.
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.
38
RISK-BASED CAPITAL/LEVERAGE
At December 31, 2002, the Corporation's total Tier I capital (defined as
tangible stockholders' equity for common stock and Trust Preferred Capital
Securities) amounted to $56.8 million or 6.89 percent of total assets. The Tier
I leverage capital ratio was 7.29 percent of total quarterly average assets.
Tier I capital excludes the effect of SFAS No. 115, which amounted to $2,184,000
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, 2002. 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 categorize
assets and off balance-sheet items into four risk-weightings and require banking
institutions to maintain a minimum ratio of capital to risk-weighted assets. At
December 31, 2002, the Corporation's Tier I and total risk-based capital ratios
were 12.20 percent and 12.73 percent, respectively. These ratios are well above
the minimum guidelines of capital to risk-adjusted assets in effect as of
December 31, 2002. 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, 2002, the Corporation had
542 common stockholders of record. This does not include beneficial owners for
whom CEDE & Company or others act as nominees. On December 31, 2002, the closing
market bid and asked price was $23.10-$23.60, respectively.
The following table sets forth the high and low bid price, and the
dividends declared, on a share of the Corporation's common stock for the periods
presented.
COMMON STOCK PRICE COMMON DIVIDENDS
2002 2001 DECLARED
HIGH LOW HIGH LOW
BID BID BID BID 2002 2001
Fourth Quarter $23.84 $19.00 $18.48 $16.76 $0.170 $0.143
Third Quarter $23.40 $18.15 $20.35 $16.29 $0.170 $0.143
Second Quarter $22.75 $19.57 $21.00 $14.60 $0.170 $0.136
First Quarter $26.71 $16.50 $17.91 $15.65 $0.143 $0.136
$0.653 $0.558
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
common share basis) and common stock prices have been adjusted for the 5 percent
common stock dividend distributed on June 1, 2002.
39
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
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.
40
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000
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 $451,867 $24,903 5.51% $342,247 $22,236 6.50% $290,405 $20,079 6.91%
Non-taxable 13,694 950 6.94% 10,968 759 6.92% 17,195 1,202 6.99%
Federal funds sold and
securities purchased under
agreement to resell 3,415 59 1.73% 6,771 331 4.89% 5,924 376 6.35%
Loans, net of unearned
income:2 222,819 14,880 6.68% 205,991 15,301 7.43% 185,846 14,407 7.75%
Total interest-earning assets 691,795 40,792 5.90% 565,977 38,627 6.82% 499,370 36,064 7.22%
Non-interest earning assets:
Cash and due from banks 18,901 17,293 16,648
Bank owned life insurance 13,738 11,598 0
Other assets 25,220 26,784 20,259
Allowance for possible
loan losses (2,336) (1,865) (1,513)
Total non-interest
earning assets 55,523 42,212 35,394
Total assets $747,318 $608,189 $534,764
LIABILITIES & STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Money market deposits $96,788 1,798 1.86% $78,878 2,042 2.59% $75,904 2,491 3.28%
Savings deposits 168,930 3,502 2.07% 118,209 3,438 2.91% 90,644 2,698 2.98%
Time deposits 103,772 3,218 3.10% 98,710 4,529 4.59% 116,449 6,249 5.37%
Other interest-bearing
deposits 65,096 703 1.08% 48,590 672 1.38% 45,568 806 1.77%
Short term borrowings
and FHLB advances 137,013 4,738 3.46% 119,565 5,304 4.44% 75,998 3,939 5.18%
Trust Preferred Securities 10,000 563 5.63% 384 22 5.60% 0 0 0.00%
Total interest-bearing
liabilities 581,599 14,522 2.50% 464,336 16,007 3.45% 404,563 16,183 4.00%
Non-interest-bearing liabilities:
Demand deposits 110,896 95,213 88,858
Other non-interest bearing
deposits 603 964 466
Other liabilities 5,962 4,971 3,614
Total non-interest bearing
liabilities 117,461 101,148 92,938
Stockholders' equity 48,258 42,705 37,263
Total liabilities and
stockholders' equity $747,318 $608,189 $534,764
Net interest income
(tax-equivalent basis) $26,270 $22,620 $19,881
Net interest spread 3.40% 3.37% 3.22%
Net interest income as percent of
earning assets (margin) 3.80% 4.00% 3.98%
Tax-equivalent adjustment 3 (323) (258) (409)
Net interest income $25,947 $22,362 $19,472
(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.
41
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
ASSETS
Cash and due from banks (Note 3) $23,220 $29,668
Investment securities held to maturity (approximate market
value of $219,921 in 2002 and $205,604 in 2001) 214,902 205,237
Investment securities available-for-sale 322,717 212,037
Total investment securities (Note 4 and 7) 537,619 417,274
Loans, net of unearned income (Note 5 and 7) 229,051 211,236
Less--Allowance for loan losses (Note 5) 2,498 2,191
Net loans 226,553 209,045
Premises and equipment, net (Note 6) 12,976 11,685
Accrued interest receivable 4,439 4,542
Bank owned separate account life insurance (Note 1) 14,143 13,382
Other assets (Note 9) 2,395 1,916
Goodwill (Note 2) 2,091 2,091
Total assets $823,436 $689,603
LIABILITIES
Deposits:
Non-interest bearing $116,984 $103,520
Interest bearing:
Certificates of deposit $100,000 and over 33,396 23,371
Savings and time deposits 465,971 370,942
Total deposits 616,351 497,833
Federal funds purchased and securities sold under agreements to
repurchase (Note 7) 75,431 72,296
Federal Home Loan Bank advances (Note 7) 65,000 60,000
Corporation - obligated Mandatorily redeemable trust preferred securities
of subsidiary trust holding solely junior subordinated debentures of the
Corporation (Note 11) 10,000 10,000
Accounts payable and accrued liabilities (Notes 8 and 9) 5,600 5,178
Total liabilities 772,382 645,307
Commitments and contingencies (Note 15)
STOCKHOLDERS' EQUITY (NOTES 10 AND 14)
Preferred Stock, no par value, Authorized 5,000,000 shares; none issued 0 0
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,749,557 and 4,732,625
shares in 2002 and 2001, respectively 18,984 14,677
Additional paid in capital 4,562 4,180
Retained earnings 29,863 28,569
Treasury stock at cost (539,202 and 569,741 shares in 2002
and 2001, respectively) (4,254) (4,115)
Restricted stock (Note 8) (285) (135)
Accumulated other comprehensive income 2,184 1,120
Total stockholders' equity 51,054 44,296
Total liabilities and stockholders' equity $823,436 $689,603
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
Interest income:
Interest and fees on loans $14,880 $15,301 $14,407
Interest and dividends on investment securities:
Taxable interest income 24,199 21,334 19,586
Non-taxable interest income 627 501 793
Dividends 704 902 493
Interest on Federal funds sold and securities purchased
under
agreement to resell 59 331 376
Total interest income 40,469 38,369 35,655
Interest expense:
Interest on certificates of deposit $100,000 and over 472 1,465 3,482
Interest on other deposits 8,749 9,216 8,762
Interest on borrowings 5,301 5,326 3,939
Total interest expense 14,522 16,007 16,183
Net interest income 25,947 22,362 19,472
Provision for loan losses (Note 5) 360 656 363
Net interest income after provision for loan losses 25,587 21,706 19,109
Other income:
Service charges, commissions and fees 1,600 1,560 1,301
Other income 1,143 747 410
Gain (Loss) on securities sold (Note 4) 592 181 (78)
Total other income 3,335 2,488 1,633
Other expense:
Salaries and employee benefits (Note 8) 9,452 7,807 6,800
Occupancy, net (Note 14) 1,644 1,509 1,340
Premises and equipment (Notes 6 and 14) 1,600 1,486 1,453
Stationery and printing 583 468 432
Marketing and advertising 576 487 490
Other 3,343 3,459 2,832
Total other expense 17,198 15,216 13,347
Income before income tax expense 11,724 8,978 7,395
Income tax expense (Note 9) 3,721 2,967 2,390
Net income $8,003 $6,011 $5,005
Earnings per share:
Basic $1.91 $1.45 $1.20
Diluted $1.89 $1.44 $1.20
Weighted average common shares outstanding:
Basic 4,196,741 4,136,782 4,161,366
Diluted 4,230,482 4,171,258 4,183,241
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
- --------------------------------------------------------------------------------------------------------------------
CCUMULATED
COMMON OTHER
STOCK ADDITIONAL TREASURY TOTAL
SHARES COMMON PAID IN RETAINED STOCK RESTRICTED ACOMPREHENSIVE STOCK
OUTSTANDING STOCK CAPITAL EARNINGS STOCK INCOME HOLDERS'
AMOUNT (LOSS) EQUITY
- --------------------------------------------------------------------------------------------------------------------
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 242 131 373
options 31,719
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) 899 899
Less reclassification adjustment
for gains included in net
income (net of tax of $62) 119 (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
- --------------------------------------------------------------------------------------------------------------------
YEAR 2002
Cash dividend (2,747) (2,747)
Common stock dividend 199,592 3,970 (3,962) 8
Issuance of common stock 16,374 337 337
Exercise of stock options 44,737 212 312 524
Restricted stock award 11,000 170 87 (150) 107
Repurchase of common stock (26,000) (538) (538)
Comprehensive income:
Net income 8,003 8,003
Unrealized holding gains on
securities arising during the
period (net of taxes of ($664)) 1,456
Less reclassification adjustment
for losses included in net
income (net of tax benefit of $200) 392
Net unrealized holding gain on
securities arising during the
period (net of tax of $464) 1,064 1,064
Total comprehensive income 9,067
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 4,210,355 $18,984 $4,562 $29,863 $(4,254) $(285) $2,184 $51,054
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,003 $ 6,011 $ 5,005
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,494 1,894 1,543
Provision for loan losses 360 656 363
Provision for deferred taxes (46) (286) (326)
(Gain) Loss on sale of investment securities available-for-sale (592) (181) 78
Decrease (increase) in accrued interest receivable 103 1,297 (1,112)
(Increase) decrease in other assets (1,199) (641) 935
Increase in other liabilities 427 1,365 709
Proceeds from the sale of other real estate owned 0 45 175
Loss (gain) on sale of other real estate owned 0 4 (102)
Amortization of premium and accretion of discount on
investment securities, net 1,982 84 39
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,532 10,248 7,307
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 213,314 119,742 22,127
available-for-sale
Proceeds from maturities of investment securities held to 149,286 98,670 15,371
maturity
(Purchase) redemption of FHLB stock (600) 310 4,803
Proceeds from sales of investment securities available-for-sale 44,338 27,660 26,357
Purchase of securities available-for-sale (369,846) (204,607) (62,542)
Purchase of securities held to maturity (157,363) (127,905) (30,343)
Net increase in loans (17,815) (12,407) (29,991)
Property and equipment expenditures, net (2,630) (3,211) (1,488)
Purchase of bank owned life insurance 0 (13,000) 0
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (141,316) (114,748) (55,706)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 118,518 72,537 36,041
Net increase in borrowings 3,135 21,034 20,510
Increase in FHLB advances 5,000 10,000 0
Dividends paid (2,747) (2,338) (2,265)
Proceeds from issuance of common stock 968 661 643
Issuance of Mandatorily Redeemable Securities of Subsidiary Trust 0 10,000 0
Repurchase of common stock (538) 0 (2,931)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 124,336 111,894 51,998
- -----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (6,448) 7,394 3,599
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 29,668 22,274 18,675
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,220 $ 29,668 $22,274
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -----------------------------------------------------------------------------------------------------------------
Interest paid on deposits and short term borrowings $ 14,440 $ 16,005 $15,851
Income taxes $ 4,364 $ 2,750 $ 2,278
Transfer of investment securities held to maturity
to investment securities available-for-sale $ 0 $ 0 $25,358
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
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 (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.
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 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.
46
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. The Corporation has
defined its population of impaired loans to 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.
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.
47
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
STOCK BASED COMPENSATION
At December 31, 2002 the Corporation has four stock-based employee
compensation plans, which are described more fully in Note 8. The Corporation
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost related to stock
options is reflected in net income, as all options granted under those plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant.
The following table illustrates the effect on net income and earnings per
share if the Corporation had applied the fair value recognition provisions of
FASB Statement No. 123, accounting for Stock-Based Compensation, to our stock
option plans.
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
Net income, as reported $8,003 $6,011 $5,005
Add: compensation expense recognized for restricted stock
award, net of related tax effect $179 $81 $10
Deduct: Total Stock-based employee compensation
expense determined under fair value based method
all awards, net of related tax effects 236 103 29
Pro forma net income $7,946 $5,989 $4,986
Earnings per share:
Basic - as reported $1.91 $1.45 $1.20
Basic - pro forma $1.89 $1.45 $1.20
Diluted - as reported $1.89 $1.44 $1.20
Diluted - pro forma $1.88 $1.44 $1.19
EARNINGS PER SHARE
All share and per share amounts have been restated to reflect the 5% common
stock dividends distributed on June 1, 2002 and in 2001.
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, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
Net income $8,003 $6,011 $5,005
Average number of common shares outstanding 4,197 4,137 4,161
Effect of dilutive options 29 26 18
Effect of restricted stock awards 4 8 4
Average number of common shares outstanding used to
calculate diluted earnings per common share 4,230 4,171 4,183
Net income per share
Basic $1.91 $1.45 $ 1.20
Diluted $1.89 $1.44 $ 1.20
48
TREASURY STOCK
As of December 31, 2002 the Corporation has purchased 26,000 common shares
at an average cost per share of $20.68 under the stock buyback program announced
on January 24, 2002 for the repurchase of up to 120,750 shares of the
Corporation's outstanding common stock.
Treasury stock is recorded using the cost method and accordingly is
presented as a reduction of stockholders' equity. In addition to the common
shares purchased under the Corporation's buyback program, 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.
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 2002, 2001, and 2000 is presented in the Consolidated Statements
of Changes in Stockholders' Equity.
BANKED OWNED LIFE INSURANCE
During 2001, the Corporation invested $13.0 million in Bank Owned Life
Insurance ("BOLI") to help offset the rising cost of employee benefits. The
change in the cash surrender value of the BOLI was recorded as a component of
the other income and amounted to $382,000 in 2001 and $761,000 in 2002.
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 2001 and 2000 to conform to the classifications presented in
2002.
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 December 31, 2001 as well as all purchase method business
combinations completed after December 31, 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 December 31, 2001, and therefore the
implementation of this Statement 141 did not have an impact on the Corporation.
SFAS NO. 142
Upon adoption of Statement 142, the Corporation was required to evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination. In addition, the Corporation was 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 was identified as having an indefinite useful life, the
Corporation was required to test the tangible asset for impairment in accordance
with the provisions of Statement 142 within the first interim period. Any
impairment loss would 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.
49
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED
In connection with the transitional goodwill impairment evaluation,
Statement 142 required the Corporation to perform an assessment of whether there
was an indication that goodwill was impaired as of the date of adoption. The
Corporation then had up to year 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 exits 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 was required to be completed as soon as possible, but no later
than the end of the year of adoption. Any transitional impairment loss would 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 had $2.1 million in unamortized
goodwill with annual amortization of $323,000, which ceased upon the adoption of
SFAS No. 142, "Goodwill and Intangible Assets". The Corporation adopted SFAS No.
142 on January 1, 2002. Accordingly, the December 31, 2002 Financial Statements
do not include amortization of goodwill. For the year ended December 31, 2001,
amortization of goodwill totaled $323,000. If SFAS No. 142 had been adopted on
January 1, 2000, net income for the years ended December 31, 2000 and 2001 would
have increased $323,000 respectively. Accordingly, basic and diluted earnings
per share would have increased $.08 for the years ended December 31, 2000 and
2001.
SFAS NO. 144
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", it retains many
of the fundamental provisions of that Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The initial adoption of SFAS No.
144 as of January 1, 2001, did not have a significant impact on the
Corporation's consolidated financial statements.
SFAS NO. 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64 Amendment of FASB Statement No. 13, and Technical Corrections.
The Statement was issued to eliminate an inconsistency in the required
accounting for sale-leaseback transactions and certain lease modifications that
were similar to sale-leaseback transactions and to rescind FASB Statement No.
44, Accounting for Intangible Assets of Motor Carriers as well as amending other
existing authoritative pronouncements to make various technical corrections.
NOTE 9: INCOME TAXES continued SFAS No. 145 also rescinds SFAS No. 4
Reporting Gains and Losses from Extinguishments of Debt and SFAS No. 64
Extinguishments of Debt Made to Satisfy Sinking Fund Requirements. Under SFAS
No. 4, as amended by SFAS No. 64, gains and losses from the extinguishment of
debt were required to be classified as an extraordinary item, if material. Under
SFAS No. 145, gains or losses from the extinguishment of debt are to be
classified as a component of operating income, rather than an extraordinary
item. SFAS No. 145 is effective for fiscal years beginning after May 16, 2002,
with early adoption of the provisions related to the rescission of SFAS No. 4
encouraged. Upon adoption, companies must reclassify prior period amounts
previously classified as an extraordinary item. Management does not anticipate
that the initial adoption of SFAS 145 will have a significant impact on the
Corporation's consolidated financial statements.
50
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The standard requires companies to recognize
cost associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002.
SFAS NO. 147
In October, 2002, the FASB issued Statement No. 147, Acquisitions of
Certain Financial Institutions- an amendment to FASB Statements No. 72 and 144
and FASB Interpretation No. 9. This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. The provisions of Statement No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination;
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill. The provisions of
Statement No. 147 were effective October 1, 2002. This Statement did not have
any impact on the Corporation's consolidated financial statements.
SFAS NO. 148
In December 2002, The Financial Accounting Standards Board (FASB) released
Statement No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure." This statement amends FASB Statement No 123, "Accounting for Stock
Based Compensation" and provides alternative methods of transition for companies
that choose to change to the fair value method of accounting for stock options.
Statement No. 148 also amends the disclosure requirements for stock-based
compensation of FASB Statement 123, regardless of the method of accounting
chosen. Under the new standard companies must disclose certain types of
information, about stock-based employee compensation prominently in both the
annual and interim financial statements.
The transition guidance and annual disclosure provisions of Statement 148
are effective for fiscal periods ending after December 15, 2002, with earlier
application permitted under certain circumstances. The Corporation adopted the
expanded disclosure requirements under Statement No.148 effective December
31,2002.
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 $563,000 and $66,000 at December 31, 2002 and 2001, respectively.
51
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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,
2002 and 2001.
DECEMBER 31, 2002
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 $125,906 $1,862 $168 $127,600
Obligations of U.S. States and political 28,696 850 58 29,488
subdivisions
Other securities 60,300 2,779 246 62,833
- -------------------------------------------------------------------------------------------------------------------
$214,902 $5,491 $472 $219,921
--------
DECEMBER 31, 2002
GROSS GROSS ESTIMATED
(DOLLARS IN THOUSANDS AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSSES VALUE
U.S. government and federal agency obligations $193,118 $1,320 $318 $194,120
Obligations of U.S. states and political 7,339 440 0 7,779
subdivisions
Other securities 58,383 2,173 306 60,250
FHLB Stock and other equity securities 60,568 0 0 60,568
- -------------------------------------------------------------------------------------------------------------------
$319,408 $3,933 $624 $322,717
DECEMBER 31, 2001
GROSS GROSS ESTIMATED
(DOLLARS IN THOUSANDS AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES HELD TO MATURITY: COST GAINS LOSSES VALUE
U.S. government and federal agency obligations $129,575 $ 984 $1,573 $128,986
Obligations of U.S. States and political 25,509 397 166 25,740
subdivisions
Other securities 50,153 986 261 50,878
- -------------------------------------------------------------------------------------------------------------------
$205,237 $2,367 $2,000 $205,604
DECEMBER 31, 2001
GROSS GROSS ESTIMATED
(DOLLARS IN THOUSANDS AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE-FOR-SALE: COST GAINS LOSSES VALUE
U.S. government and federal agency obligations $141,931 $ 909 $670 $142,170
Obligations of U.S. states and political 10,080 188 4 10,264
subdivisions
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
52
The following table presents information for investments in securities held
to maturity and securities available-for-sales at December 31, 2002, based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due. Equity securities held in the available for sale portfolio are
included in the due in one year or less category in the table below.
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 $ 6,805 $ 6,905 $69,584 $69,703
Due after one year through five years 22,321 23,345 39,586 40,816
Due after five years through ten years 36,163 37,382 32,706 33,446
Due after ten years 149,613 152,289 177,532 178,752
Total $214,902 $219,921 $319,408 $322,717
During 2002, securities sold from the Corporation's available-for-sale
portfolio amounted to approximately $44.3 million. The gross realized losses on
securities sold amounted to $536,615, while the gross realized gains amounted to
$1,129,052 in 2002. Securities sold from the Corporation's available-for-sale
portfolio during 2001 amounted to $27.7 million with a gross realized gain of
$319,541 and a gross realized losses of $138,741. Securities sold from the
Corporation's available-for-sales portfolio during 2000 amounted to $26.4
million with a gross realized loss of $111,989 (and a gross realized gain of
$33,143). 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.
Investment securities having a carrying value of approximately $158.2
million and $149.4 million at December 31, 2002 and 2001, respectively, were
pledged to secure public deposits, short-term borrowings, FHLB advances and for
other purposes required or permitted by law.
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth the composition of the Corporation's loan
portfolio at December 31, 2002 and 2001, respectively:
(DOLLARS IN THOUSANDS) 2002 2001
Real estate--residential mortgage $119,674 $116,335
Real estate--commercial 73,723 52,805
Commercial and industrial 30,758 36,917
Installment 4,707 4,808
All other 189 371
Total $229,051 $211,236
At December 31, 2002 and 2001 loans to officers and directors aggregated
approximately $3,868,000 and $3,477,000 respectively. During the year ended
December 31, 2002, the Corporation made new loans to officers and directors in
the amount of $2,225,000; payments by such persons during 2002 aggregated
$1,834,000. 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.
53
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 5: LOANS AND THE ALLOWANCE FOR LOAN LOSSES CONTINUED
A summary of the activity in the allowance for loan losses is as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000
Balance at the beginning of year $2,191 $1,655 $1,423
Provision for loan losses 360 656 363
Loans charged-off (117) (127) (135)
Recoveries on loans previously charged-off 64 7 4
Balance at the end of year $2,498 $2,191 $1,655
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, 2002, 2001 and 2000 were as follows:
(DOLLARS IN THOUSANDS) 2002 2001 2000
Loans past due in excess of 90 days and still accruing $ 0 $ 8 $ 2
Non-accrual loans 229 109 246
Other real estate owned 0 0 49
Total non-performing assets $229 $117 $297
The amount of interest income that would have been recorded on non-accrual
loans in 2002, 2001 and 2000 had payments remained in accordance with the
original contractual terms approximated $11,000, $1,000 and $19,000
respectively, while no interest income was received on these types of assets in
2002, 2001 and 2000.
At December 31, 2002, total impaired loans were approximately $175,000
compared to $1,859,000 at December 31, 2001 and $1,464,000 at December 31, 2000.
The reserves allocated to such loans in 2002, 2001 and 2000 were $1,000,
$279,000 and $146,000. Although classified as substandard at December 31, 2002,
the impaired loans were current with respect to principal and interest payments.
The Corporation's total average impaired loans were $1,835,000 during 2002,
$1,897,000 during 2001 and $1,484,000 during 2000. Interest income on impaired
loans totaled $156,000 in 2002, $161,000 in 2001 and $138,000 in 2000.
At December 31, 2002, 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.
NOTE 6: BANK PREMISES AND EQUIPMENT
Bank premise and equipment are summarized as follows:
(DOLLARS IN THOUSANDS) 2002 2001
Land $2,403 $2,403
Buildings 8,394 7,151
Furniture, fixtures and equipment 11,914 10,754
Leasehold improvements 1,457 1,457
Subtotal 24,168 21,765
Less accumulated depreciation and amortization 11,192 10,080
Total $12,976 $11,685
Depreciation expense for the three years ended December 31, 2002 amounted
to $1,338,530 in Center Bancorp, Inc. Notes to consolidated financial statements
continued 2002, $1,276,465 in 2001 and $1,220,560 in 2000, respectively.
54
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
At December 31, 2002 and 2001, advances from the Federal Home Loan Bank of
New York (FHLB) amounted to $65,000,000 and $60,000,000, respectively. The FHLB
advances had a weighted average interest rate of 5.32 percent and 5.48 percent
at December 31, 2002 and December 31, 2001, 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, 2002, and 2001
are contractually scheduled for repayment as follows:
(DOLLARS IN THOUSANDS) 2002 2001
2010 $50,000 $50,000
2011 10,000 10,000
2012 5,000 0
Total $65,000 $60,000
Other borrowings consisting of securities sold under agreements to
repurchase had average balances of $72,909,000, $59,425,000, and $35,205,000,
for the years ended December 31, 2002, 2001 and 2000, respectively. The maximum
amount outstanding at any month end during 2002, 2001 and 2000, respectively,
was $85,110,000, $90,079,000 and $51,262,000. The average interest rate paid on
securities sold under agreements to repurchase were 1.63%, 3.30%, and 4.46% for
the years ended December 31, 2002, 2001 and 2000, 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 $63,000 in 2002 and $70,200 for
2001 and 2000, respectively, and is included in non-interest expense.
The following table sets forth changes in projected benefit obligation,
changes in fair value of plan assets, funded status, and amounts recognized in
the consolidated statements of condition for the Corporation's pension plans at
December 31, 2002 and 2001.
CHANGE IN BENEFIT OBLIGATION (DOLLARS IN THOUSANDS) 2002 2001
Projected benefit obligation at beginning of year $ 6,348 $ 5,324
Service cost 476 373
Interest cost 450 414
Actuarial loss (gain) 634 511
Benefits paid (248) (274)
Projected benefit obligation at end of year $ 7,660 $ 6,348
Change in Plan Assets
Fair value of plan assets at beginning year $ 4,477 $ 4,523
Actual return on plan assets (443) (168)
Employer contributions 607 396
Benefits paid (248) (274)
Fair value of plan assets at end of year $ 4,393 $ 4,477
Funded status $(3,267) $(1,871)
Unrecognized net asset 0 (3)
Unrecognized prior service cost 81 96
Unrecognized net actuarial loss 1,793 368
Accrued benefit cost $(1,393) $(1,410)
55
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 8: PENSION AND BENEFITS CONTINUED
The net periodic pension cost for 2002, 2001 and 2000 includes the following
components.
(DOLLARS IN THOUSANDS) 2002 2001 2000
Service cost $467 $373 $382
Interest cost 450 414 385
Expected return on plan assets (383) (377) (376)
Net amortization and deferral 46 (18) (6)
Net periodic pension expense $589 $392 $385
The following table presents the assumptions used to calculate the
projected benefit obligation in each of the last three years.
2002 2001 2000
Discount rate 6.75% 7.25% 8.00%
Rate of compensation increase 5.25% 5.75% 7.00%
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 2002, 2001, and 2000, employer contributions amounted to
$103,000, $92,000 and $82,000, respectively.
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 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.
Change in options outstanding during the past three years were as follows:
EXERCISE PRICE RANGE
STOCK OPTION PLAN SHARES PER SHARE
Outstanding, December 31, 1999,
(158,066 shares exercisable) 211,163 $9.96 to $14.06
Granted during 2000 0
Exercised during 2000 (34,968) $10.70
Expired or canceled during 2000 (4,622) $14.06
Outstanding, December 31, 2000,
(139,514 shares exercisable) 171,573 $9.96 to $14.06
Granted during 2001 34,458 $17.86
Exercised during 2001 (35,806) $10.70
Expired or canceled during 2001 (747) $14.06
Outstanding, December 31, 2001,
(114,008 shares exercisable) 169,478 $9.96 to $17.86
Granted during 2002 14,000 $20.76
Exercised during 2002 (45,536) $9.96 to $14.08
Expired or canceled during 2002 (808) $14.06
Outstanding, December 31, 2002
(89,851 shares exercisable) 137,134 $9.96 to $20.76
56
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 2002 and 2001. There were no
options issued in 2000.
The following weighted average assumptions were used to determine the fair
value of the options granted in 2002:
o Dividend yield of 2.73%
o Expected volatility of 30.6%
o Risk-free interest rate of 4.34% based upon equivalent-term
Treasury Rates
o Expected options lives of 6 years, which were contractual lives
at the date of grant
The following weighted average assumptions were used to determine the fair
value of the options
o granted 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, 2002, 2001 and 2000.
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
GRANTED FAIR VALUE GRANTED FAIR VALUE GRANTED FAIR VALUE
Incentive stock options 0 $0.00 0 $0.00 0 $0.00
Non-qualifying stock options 14,000 $5.76 0 $0.00 0 $0.00
Director's plan 0 $0.00 34,459 $4.18 0 $0.00
Total 14,000 $5.76 34,459 $4.18 0 $0.00
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 2002, 11,000 shares were awarded and issued from
Treasury shares. During 2001, 5,000 shares were awarded and issued from Treasury
shares. 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 $257,000 in 2002 and $107,500 in 2001 and $15,000 in 2000. As
of December 31, 2002, 8,258 shares of the restricted stock awards were vested.
NOTE 9: INCOME TAXES
The current and deferred amounts of income tax expense for the years ended
December 31, 2002, 2001 and 2000, respectively, are as follows:
(DOLLARS IN THOUSANDS) 002 2001 2000
CURRENT:
Federal $3,487 $3,129 $2,620
State 280 124 96
3,767 3,253 2,716
DEFERRED:
Federal (7) (249) (247)
State (39) (37) (79)
(46) (286) (326)
Income tax expense $3,721 $2,967 $2,390
57
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 9: INCOME TAXES
The amount of income tax included in the comprehensive income was
$1,125,000, $733,000 and $226,000, for the years ended December 31, 2002, 2001
and 2000, 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) 2002 2001 2000
Income before income tax expense $11,724 $8,978 $7,395
Federal statutory rate 34% 34% 34%
Compute "expected" Federal income tax expense 3,986 3,053 2,514
State tax net of Federal tax benefit 180 57 63
Decrease in valuation allowance 0 0 (54)
Bank owned life insurance (259) (130) 0
Tax-exempt interest and dividends (222) (177) (270)
Goodwill 0 110 110
Other, net 36 54 27
Income tax expense $ 3,721 $2,967 $2,390
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
2002 and 2001 are presented below:
(DOLLARS IN THOUSANDS) 2002 2001
Deferred tax assets:
Allowance for loan losses $ 703 $ 616
Pension expense 783 895
Organization cost 37 52
Total gross deferred tax asset $1,523 $1,563
Deferred tax liabilities:
Depreciation $ 264 $ 239
Market discount accretion 47 135
Deferred fee expense-mortgages 241 258
Unrealized gains on securities available-for-sale 1,125 733
Other 5 11
Total gross deferred tax liabilities 1,682 1,376
Net deferred tax (liability) asset $(159) $ 187
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,
2002 and 2001, respectively.
NOTE 10: REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 2002, 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%.
58
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, 2002, 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, 2002 and 2001, 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, 2002
Leverage (Tier 1) capital $52,749 6.78% $31,136 4.00% $38,920 5.00%
RISK-BASED CAPITAL:
Tier 1 52,749 11.34% 18,608 4.00% 27,912 37,216
Total 55,247 11.88% 37,216 8.00% 46,251 10.00%
DECEMBER 31, 2001
Leverage (Tier 1) capital $46,949 7.15% $26,319 4.00% 5.00% $32,794
RISK-BASED CAPITAL:
Tier 1 46,949 11.34% 16,5674. 4.00% 24,851 6.00%
Total 49,140 11.86% 33,135 8.00% 41,418 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 2002 CAPITAL
Tier 1 Leverage 7.29% 7.77% 4.00% 5.00% $56,773 $31,146
Tier 1 Based Capital 12.20% 12.37% 4.00% 6.00% $56,773 $18,618
Total Based Capital 12.73% 13.13% 8.00% 10.00% $59,271 $37,236
59
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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, 2002.
REDEEMABLE BY
ISSUANCE DATE SECURITIES ISSUED LIQUIDATION VALUE COUPON RATE MATURITY ISSUER BEGINNING
12/18/01 $10,000,000 $1,000 per Capital Floating 12/18/2031 12/18/2006
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, if equal to the amount payable
on demand as of December 31, 2002 and 2001. 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.
60
The fair value of FHLB advances is based on the discounted value of
estimated cash flows. The discount rate is estimated using the rates currently
offered for similar advances. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature, involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
liabilities, goodwill, and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered.
The estimated fair value of the Corporation's financial instruments is as
follows:
DECEMBER 31
2002 2001
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
FINANCIAL ASSETS:
Cash and cash equivalents $23,220 $23,220 $29,668 $29,668
Investments Available-for-Sale 322,717 322,717 212,037 212,037
Investments Held to Maturity 214,902 219,921 205,237 205,604
Net loans 226,553 232,442 209,045 209,620
FINANCIAL LIABILITIES:
Non-interest bearing deposits 116,984 116,984 103,520 103,520
Interest-bearing deposits 499,367 502,171 394,313 395,104
Federal funds purchased, securities sold under
agreement to repurchase and FHLB advances 140,431 149,525 $132,296 $133,217
Securities of Subsidiary Trust $ 10,000 $ 10,000 $ 10,000 $ 10,000
NOTE 13: PARENT CORPORATION ONLY FINANCIAL STATEMENTS
Center Bancorp, Inc. operates its wholly owned subsidiaries, 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).
61
Condensed financial statements of the Parent Corporation only are as
follows:
CONDENSED STATEMENTS OF CONDITION
AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
ASSETS
Cash and cash equivalents $3,881 $4,193
Investment in subsidiary 57,025 50,163
Other investments 310 310
Other assets 970 900
Total assets $62,186 $55,566
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 822 $ 960
Subordinated debentures 10,310 10,310
Stockholders' equity 51,054 44,296
Total liabilities and stockholders' equity $62,186 $55,566
CONDENSED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001 2000
Income
Dividend income from subsidiary $2,827 $1,937 $4,658
Management fees 96 32 32
Total Income 2,923 1,969 4,690
Expenses (718) (285) (164)
Net income before equity in earnings of subsidiary 2,205 1,684 4,526
Undistributed equity in earnings of subsidiary 5,798 4,327 479
Net Income $8,003 $6,011 $5,005
CONDENSED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31
(DOLLARS IN THOUSANDS) 2002 2001 2000
Operating Activities:
Net income $8,003 $6,011 $5,005
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed equity in earnings of subsidiary (5,798) (4,327) (479)
Other, net (93) (26) 13
Net cash provided by operating activities 2,112 1,658 4,539
Investing Activities:
Investments in subsidiaries 0 (6,000) 0
Net cash used in investing activities 0 (6,000) 0
Financing Activities:
Cash dividends (2,747) (2,338) (2,265)
Proceeds from exercise of stock options 524 490 388
Proceeds from issuance of common stock 337 255 255
Proceeds from issuance of subordinated debentures 0 10,000 0
Purchase of Treasury Stock (538) 0 (2,931)
Net cash (used in) provided by financing activities (2,424) 8,407 (4,553)
(Decrease) increase in cash and cash equivalents (312) 4,065 (16)
Cash and cash equivalents at beginning of year 4,193 128 144
Cash and cash equivalents at the end of year $3,881 $4,193 $ 128
62
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, 2002, $13.3
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 $57,031,000, ($49,231,000 subject to variable rate
indices and $7,800,000 fixed rate commitments) as of December 31, 2002. Standby
letters of credit, which are not reflected in the accompanying consolidated
financial statements, totaled $14,716,000 and $13,473,000 as of December 31,
2002 and 2001, respectively. Commitments to extend credit and standby letters of
credit generally do not exceed one year. These financial instruments involve, to
varying degrees, elements of credit risk in excess of the amounts recognized in
the consolidated financial statements. The commitment or contract amount of
these financial instruments is an indicator of the Corporation's level of
involvement in each type of instrument as well as the exposure to credit loss in
the event of non-performance by the other party to the financial instrument. The
Corporation controls credit risk of these financial instruments through credit
approvals, limits and monitoring procedures. To minimize potential credit risk
the Corporation generally requires collateral and other credit-related terms and
conditions from the customer. In the opinion of management, the financial
condition of the Corporation will not be materially affected by the final
outcome of these commitments and contingent liabilities.
A substantial portion of the Bank's loans 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.
Other expenses include rentals for premises and equipment of $390,519 in
2002, $371,493 in 2001 and $357,645 in 2000. At December 31, 2002, 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 2003 through 2007
are $410,570, $435,906, $456,111, $477,833 and $502,586 respectively. Minimum
rentals due 2008 and after are $547,521.
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.
63
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 16: QUARTERLY FINANCIAL INFORMATION
CENTER BANCORP, INC., (UNAUDITED)
2002
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
Total interest income $9,565 $10,242 $10,284 $10,378
Total interest expense 3,450 3,784 3,611 3,677
Net interest income 6,115 6,458 6,673 6,701
Provision for loan losses 90 90 90 90
Other income 864 919 737 815
Other expense 4,341 4,185 4,217 4,455
Income before income taxes 2,548 3,102 3,103 2,971
Net income 1,777 2,104 2,087 2,035
Earnings per share:
Basic $0.42 $ 0.50 $ 0.50 $ 0.49
Diluted $0.42 $ 0.50 $ 0.49 $ 0.48
Weighted average common shares outstanding:
Basic 4,203,091 4,212,865 4,197,843 4,173,165
Diluted 4,238,624 4,244,384 4,231,190 4,207,730
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 $0.42 $ 0.36 $ 0.34 $ 0.33
Diluted $0.42 $ 0.36 $ 0.34 $ 0.33
Weighted average common shares outstanding:
Basic 4,154,735 4,141,860 4,133,691 4,116,837
Diluted 4,191,600 4,179,733 4,167,571 4,150,446
64
KPMG
New Jersey
Headquarters 150
John F. Kennedy
Parkway Short Hills,
NJ 07078
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, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2002. 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, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As disclosed in Note 2 of the Notes to the Consolidated Financial
Statements, the Corporation adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002.
KPMG LLP
Short Hills, New Jersey
January 23, 2003
65
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 15, 2003 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 10K
Persons may obtain a copy, free of charge, of the Center Bancorp, Inc.
2002 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
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
66
LOCATIONS
UNION MADISON
MAIN OFFICE MADISON BANKING CENTER
2455 Morris Avenue 300 Main Street
Union, NJ 07083 Madison, NJ 07940
(908) 688-9500 Lobby, Drive-Up and ATM
Lobby, Drive-Up and ATM
MORRISTOWN
CENTER OFFICE MORRISTOWN BANKING CENTER
2003 Morris Avenue 84 South Street
Union, NJ 07083 Morristown, NJ 07960
Lobby and ATM Lobby and ATM
STOWE STREET TOWN HALL BANKING CENTER
2022 Stowe Street 214 South Street
Union, NJ 07083 Morristown, NJ 07960
Drive-Up, Walk-Up and ATM Lobby, Drive-Up and ATM
FIVE POINTS SPRINGFIELD
SPRINGFIELD BANKING CENTER
356 Chestnut Street
Union, NJ 07083 783 Mountain Avenue
Lobby, Drive-Up and ATM Springfield, NJ 07081
Lobby, Drive-Up and ATM
CAREER CENTER
SUMMIT
Union High School
SUMMIT BANKING CENTER
North Third Street
Union, NJ 07083 392 Springfield Avenue
Lobby Summit, NJ 07901
Lobby and ATM
AUTO BANKING CENTER
Bonnel Court VAUXHALL/MILLBURN
MILLBURN MALL BANKING CENTER
Union, NJ 07083
Drive-Up, Walk-Up and ATM 2933 Vauxhall Road
Vauxhall, NJ 07088
UNION HOSPITAL Lobby and ATM
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
67
CENTER BANCORP, INC.
2455 Morris Avenue, Union, NJ 07083
68