Exhibit 13.1
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31,
PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 CHANGE
- ----------------------------------------------------------------------------------------------------
EARNINGS
Net Interest Income $ 23,193 $ 25,947 (10.61)
Provision for Loan Losses 522 360 45.00
Other Income 2,981 2,743 8.68
Gain on Securities Sold 266 592 (55.07)
Other Expenses 18,336 17,198 6.62
Net Income 6,419 8,003 (19.79)
Cash Dividends Declared $ 3,014 $ 2,747 9.72
- ----------------------------------------------------------------------------------------------------
PER SHARE DATA
Net Income
Basic $0.76 0.95 (20.00)
Diluted 0.75 0.95 (21.05)
Cash Dividends Paid 0.35 0.33 6.06
Book Value 6.36 6.06 4.95
Tangible Book Value $6.11 5.81 5.16
- ----------------------------------------------------------------------------------------------------
AT YEAR END:
Market Value Bid Ask Bid Ask
Per common share $19.62 $ 19.66 $11.55 $11.80
- ----------------------------------------------------------------------------------------------------
AT YEAR END:
Investment Securities $519,234 $537,619 (3.42)
Loans 349,525 229,051 52.60
Assets 921,824 823,436 11.95
Deposits 632,921 616,351 2.69
FHLB advances 115,000 65,000 76.92
Federal funds purchased and securities sold
under agreements to repurchase 99,724 75,431 32.21
Stockholders' Equity $ 54,180 $ 51,054 6.12
Shares Outstanding 8,518,516 8,420,710 1.16
- ----------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average assets 0.74% 1.07%
- --------------------------------------------------------------------------------------------
Return on average stockholders' equity 12.35% 16.58%
Return on tangible average stockholders' equity 12.87% 17.33%
- --------------------------------------------------------------------------------------------
Cash dividend declared as a
percent of net income 46.95% 34.33%
- --------------------------------------------------------------------------------------------
Stockholders' equity as a percent of total assets 5.88% 6.20%
Tangible stockholders' equity as a percent of total assets 5.65% 5.95%
- --------------------------------------------------------------------------------------------
Average Risk Based Tier I Capital Ratio 13.22% 12.20%
Average Risk Based Tier I and Tier II Capital Ratio 13.81% 12.73%
Tier I Leverage Ratio 7.44% 7.29%
============================================================================================
All per common share amounts have been adjusted retroactively for common
stock splits and common stock dividends during the periods presented.
CENTER BANCORP, INC.
SUMMARY OF SELECTED STATISTICAL INFORMATION
AND FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
SUMMARY OF INCOME
Interest income $ 35,919 $ 40,469 $ 38,369 $ 35,655 $ 32,092
Interest expense 12,726 14,522 16,007 16,183 12,801
Net interest income 23,193 25,947 22,362 19,472 19,291
Provision for loan losses 522 360 656 363 108
Net interest income after provision
for loan losses 22,671 25,587 21,706 19,109 19,183
Other income 3,247 3,335 2,488 1,633 1,089
Other expense 18,336 17,198 15,216 13,347 13,290
Income before income tax expense 7,582 11,724 8,978 7,395 6,982
Income tax expense 1,163 3,721 2,967 2,390 2,353
Net income $ 6,419 $ 8,003 $ 6,011 $ 5,005 $ 4,629
- -------------------------------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION DATA
Investments $519,234 $537,619 $417,274 $330,267 $303,940
Total loans 349,525 229,051 211,236 198,949 169,089
Total assets 921,824 823,436 689,603 569,553 509,624
Deposits 632,921 616,351 497,833 425,296 389,255
Stockholders' equity $ 54,180 $ 51,054 $ 44,296 $ 39,182 $ 36,513
- -------------------------------------------------------------------------------------------------------
DIVIDENDS
Cash dividends $ 3,014 $ 2,747 $ 2,338 $ 2,265 $ 2,213
Dividend payout ratio 46.9% 34.3% 38.9% 45.3% 47.8%
- -------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE
Cash dividends $ 0.35 $ 0.33 $ 0.28 $ 0.28 0.26
- -------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $ 0.76 $ 0.95 $ 0.73 $ 0.60 $ 0.56
Diluted $ 0.75 $ 0.95 $ 0.72 $ 0.60 $ 0.55
- -------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES O
Basic 8,475,394 8,393,482 8,273,564 8,322,732 8,325,740
Diluted 8,564,147 8,460,964 8,342,516 8,366,482 8,378,294
- -------------------------------------------------------------------------------------------------------
OPERATING RATIOS
Return on average assets 0.74% 1.07% 0.99% 0.94% 0.92%
Return on tangible average equity 12.87% 17.33% 14.86% 14.43% 13.50%
- -------------------------------------------------------------------------------------------------------
BOOK VALUE
Book value per common share $ 6.36 $ 6.06 $ 5.32 $ 4.77 $ 4.37
Tangible book value per common share $ 6.11 $ 5.81 $ 5.07 $ 4.48 $ 4.04
- -------------------------------------------------------------------------------------------------------
NON-FINANCIAL INFORMATION
Common stockholders 527 542 543 581 603
Staff - Full time equivalent 191 182 172 156 162
- -------------------------------------------------------------------------------------------------------
Footnote: All per common share amounts have been adjusted retroactively for
common stock splits and common stock dividends during the periods presented.
15
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 2003.
While profitability lagged in 2003 as compared with the record results
achieved in 2002, Center Bancorp (the "Corporation") reported earnings in 2003
that continued to reflect solid results and core growth in market share. We took
strategic action on improving our net interest margin, most recently reflected
in the fourth quarter results, continued to grow our core deposits, and had
record growth in our loan portfolio.
Earnings performance in 2003 was impacted by the continued economic
downturn, contraction of net interest margins and an increase of 6.62 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, 2003, net income decreased 19.8 percent to
$6,419,000 or $0.75 per diluted share, as compared to $8,003,000 or $.95 per
diluted share earned for the year ended December 31, 2002. Strong
interest-earning asset growth in the loan portfolio helped to mitigate some
effects of interest rate pressure, with loans at December 31, 2003 increasing
$120.5 million to a record year-end level of $349.5 million (up 52.6 percent
over the prior 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 our market in New Jersey,
despite the economic downturn at both the state and national levels. We are
encouraged by the strength of loan demand and positive momentum gained this past
year in growing that segment of earning-assets.
While asset quality continues to remain high and credit culture
conservative, during 2003, a total of $522,000 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 percentage
of residential and commercial related real estate loans. At December 31, 2003
the total allowance for loan and lease losses amounted to .86 percent of total
loans.
The geographic expansion of the Corporation into desirable markets, such as
Summit, New Jersey and into Morris County with branches in Madison and
Morristown, New Jersey over the past several years, has contributed to the
growth in market share, as well as increased loan demand and growth in deposits.
The Corporation announced in the fourth quarter the acquisition of a new 19,555
square foot office facility on Springfield Road in Union that will serve as
Union Center National Bank's new operations and data center. This step is
expected to enhance the Corporation's ability to continue to grow and expand its
product lines for future success. We expect the new facility to be operational
in the latter part of 2004.
Deposit growth was strong in 2003. The growth in average deposits was
reflected in core interest- bearing accounts, premium savings and demand
deposits. At December 31, 2003, total deposits for the Corporation were $632.9
million. Non-interest bearing core deposits, a low-cost source of funding,
continue to be a key-funding source. At December 31, 2003, this source of
funding amounted to $120.5 million or 13.97 percent of total funding sources and
19.0 percent of total deposits.
For the year 2003 average interest-earning assets grew $118.6 million or
17.14 percent over the comparable twelve-month period ended December 31, 2002.
Interest-bearing liabilities increased on average $112.1 million, an increase of
19.26 percent over the comparable period in 2002.
Non-interest revenue generation remained consistent in 2003 and increased as
a percentage of total revenue. This revenue, exclusive of gains on securities
sold (which decreased $326,000 during 2003), increased $238,000 or 8.68 percent
for the twelve months ended December 31, 2003 as compared with the comparable
period in 2002. The change from the comparable period in 2002 was driven
primarily by the increase in fees generated by lending activities, an increase
of $54,578 or 21.3 percent. This amount includes loan servicing and mortgage
banking fees and letter of credit fees. Other income also increased as a result
of an increase in the cash surrender value of bank owned life insurance, which
amounted to $798,000 or an increase of $37,000 for the year ended December 31,
2003 in
16
comparison to $761,000 for the comparable period of 2002. Consistent levels of
service charges, commissions, and fees supported by increased customer activity
resulted in increased overdraft,ATM and debit card fees.
Operating expenses for the year increased 6.62 percent with increased
salary, benefits and bank premise and occupancy expense accounting for most of
the increase.
Total assets at December 31, 2003, were $921.8 million, an increase of 11.95
percent from assets of $823.4 million at December 31, 2002. Annualized returns
on average assets for the year ended December 31, 2003 was 0.74% compared to
1.07 percent for 2002.
Total stockholders' equity increased 6.1 percent over 2002 to $54.2 million,
and represented 5.88% of total assets at year-end. Book value per common share
was $6.36, as compared with $6.06 a year ago. Tangible book value per common
share increased to $6.11 from $5.81 a year ago. Return on average stockholders'
equity for the year ended December 31, 2003 was 12.4 percent compared to 16.6
percent for 2002. This decrease in return was primarily due to a decline in
earnings attributable in part to the net interest margin compression experienced
in 2003. The Tier I Leverage capital ratio increased to 7.44 percent of total
assets at December 31, 2003, as compared with 7.29 percent at December 31, 2002.
A key element of the Corporation's consistent performance is its strong
capital base. Our consolidated statement of condition reflects $15.0 million in
subordinated debentures as of December 31, 2003. The most recent issuance of
$5.0 million in floating rate MMCapS(SM) Securities occurred on December 19,
2003. The Corporation expects to use the net proceeds of this issuance for
working capital and other general corporate purposes, including capital
contributions to the Company's banking subsidiary to support its growth
strategies. These securities presently are included as a component of Tier I
capital for regulatory capital purposes. As a result of the adoption of FASB
Interpretation No. 46, these securities are classified as subordinated
debentures on the Consolidated Statement of Condition.
The Corporation's risk-based capital ratios at December 31, 2003 were 13.40
percent for Tier I capital and 13.63 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 12.9
percent in 2003, compared with 17.3 percent for 2002 and 14.9 percent in 2001.
The Corporation announced a common stock buyback program on January 24,
2002, under which the Corporation was authorized to purchase up to 241,500
shares (restated to reflect the 5 percent common stock dividend distributed on
June 1, 2002 and the two-for one common stock split distributed on June 2, 2003
) of the Corporation's outstanding common stock. Under the program repurchases
may be made from time to time as, in the opinion of management, market
conditions warrant, in the open market or in privately negotiated transactions.
As of December 31, 2003 the Corporation had previously repurchased 52,000 shares
under the program at an average cost of $10.34 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.
17
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) decreased by 19.79
percent , 20.00 percent and 21.05 percent , respectively, for the year ended
December 31, 2003, compared to the year ended December 31, 2002. This compared
to increases of 33.14 percent, 30.14 percent and 31.94 percent, respectively,
for the year ended December 31, 2002, as compared to the year ended December 31,
2001. Net income for the year ended December 31, 2003 was $6,419,000 as compared
to $8,003,000 earned in 2002 and $6,011,000 earned in 2001.
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 return on average assets was .74 percent for the year ended December 31,
2003 as compared with 1.07 percent for 2002 and 0.99 percent for 2001, while the
return on tangible average stockholders' equity was 12.87 percent, 17.33 percent
and 14.86 percent, respectively.
Earnings performance for the year ended December 31, 2003, 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 were fueled by a higher
level of interest-earning assets coupled with a double-digit percentage gain in
non-interest revenue. These improvements were offset by a contraction of the net
interest margin, an increase in non-interest expense and an increase in the
provisions for loan losses and taxes.
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 2003, including
the volume, pricing, mix and maturity of earning assets and interest-bearing
liabilities and interest rate fluctuations.
18
The following table presents the components of net interest income (on a
tax-equivalent basis) for the past three years.
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------
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 $22,218 $(3,635) (14.06) $25,853 $ 2,858 12.43 $22,995 $1,714 8.05
Loans, including fees 15,131 251 1.69 14,880 (421) (2.75) 15,301 894 6.21
Federal funds sold and
securities purchased under
agreement to resell 0 (59) (100.0) 59 (272) (82.18) 331 (45) (11.97)
- -----------------------------------------------------------------------------------------------------------------
Total interest income 37,349 (3,443) (8.44) 40,792 2,165 5.60 38,627 2,563 7.11
=================================================================================================================
INTEREST EXPENSE:
Certificates $100,000 or more 461 (11) (2.33) 472 (993) (67.78) 1,465 (2,017) (57.93)
Deposits 6,712 (2,037) (23.28) 8,749 (467) (5.07) 9,216 454 5.18
Borrowings 5,553 252 4.75 5,301 (25) (0.47) 5,326 1,387 35.21
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 12,726 (1,796) (12.37) 14,522 (1,485) (9.28) 16,007 (176) (1.09)
=================================================================================================================
Net interest income
on a fully tax-equivalent 24,623 (1,647) (6.27) 26,270 3,650 16.14 22,620 2,739 13.78
- -----------------------------------------------------------------------------------------------------------------
basis
Tax-equivalent adjustment (1,430) (1,107) 342.72 (323 65 25.19 (258) 151 (36.92)
- -----------------------------------------------------------------------------------------------------------------
Net interest income * $23,193 (2,754) (10.61) $25,947 $ 3,585 16.03 $22,362 $2,890 14.84
=================================================================================================================
* 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 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.
NET INTEREST INCOME
- -------------------
Net interest income on a fully tax-equivalent basis, for the year ended
December 31, 2003 decreased $1.6 million or 6.27 percent, from $26.3 million for
2002. The Corporation's net interest margin decreased 76 basis points to 3.04
percent from 3.80 percent.
The change in net interest income was primarily attributable to the
declining interest rate environment that impacted financial institutions during
2003. A 67 basis point decline in the average interest rates paid on total
interest-bearing liabilities was offset in part by a 129 basis point decrease in
the average yield on interest-earning assets from 5.90 percent in 2002 to 4.61
percent for 2003. The change in average yield on both interest-earning assets
and interest-bearing liabilities reflected the decline in interest rates that
occurred in 2002 and the subsequent historical lows reached in rates in mid 2003
and prevailing low interest rate environment that has prevailed throughout the
remainder of 2003.
For the year ended December 31, 2003, interest-earning assets increased by
$118.6 million on average to $810.4 million, as compared with a $691.8 million
average volume for the year ended December 31, 2002. The 2003 change in average
interest-earning asset volume was primarily due to increased volumes of loans
and investment securities which were funded in part with more expensive
interest-bearing liabilities, principally higher rate time deposit products such
as Certificates of Deposit, coupled with increased volumes of other borrowings.
19
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
The factors underlying the year-to-year changes in net interest income
are reflected in the tables appearing on this page and on pages 19 and 37,
each of which have been presented on a tax-equivalent basis (assuming a 34
percent tax rate). The table on page 37 (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.
NET INTEREST MARGIN
- -------------------
The following table quantifies the impact on net interest income
resulting from changes in average balances and average rates over the past
three years. Any change in interest income or expense attributable to both
changes in volume and changes in rate has been allocated in proportion to the
relationship of the absolute dollar amount of change in each category.
ANALYSIS OF VARIANCE IN NET INTEREST
INCOME DUE TO VOLUME AND RATES
- ------------------------------
2003/2002 2002/2001
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
- ----------------------------------------------------------------------------------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET
(DOLLARS IN THOUSANDS) VOLUME RATE CHANGE VOLUME RATE CHANGE
- ----------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
INVESTMENT SECURITIES:
Taxable $569 $(7,459) $(6,890) $6,389 $(3,722) $2,667
Non-Taxable 3,421 (166) 3,255 189 2 191
Federal funds sold and securities
purchased under agreement to resell (59) (0) (59) (118) (154) (272)
Loans, net of unearned discounts 3,213 (2,962) 251 1,194 (1,615) (421)
- ----------------------------------------------------------------------------------------------
Total interest-earning assets 7,144 (10,587) (3,443) 7,654 (5,489) 2,165
- ----------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposits (40) (734) (774) 405 (649) (244)
Savings deposits (290) (1,335) (1,625) 1,221 (1,157) 64
Time deposits 1,215 (552) 663 222 (1,533) (1,311)
Other interest-bearing deposits 54 (366) (312) 198 (167) 31
Borrowings 2,187 (1,935) 252 1,247 (1,272) (25)
- ----------------------------------------------------------------------------------------------
Total interest-bearing liabilites 3,126 (4,922) (1,796) 3,293 (4,778) (1,485)
- ----------------------------------------------------------------------------------------------
CHANGE IN NET
INTEREST INCOME $4,018 $(5,665) $(1,647) $4,361 $ (711) $3,650
==============================================================================================
Interest income on a fully tax-equivalent basis for the year ended December
31, 2003 decreased by approximately $3.4 million or 8.44 percent as compared
with the year ended December 31, 2002. This decrease resulted from substantial
decreases in the yields earned on interest earning-assets. The average yield on
such assets declined from 5.90 percent in 2002 to 4.61 percent in 2003. The
decline in interest income was offset in part by a $53.6 million increase in
average loans; from $222.8 million in 2002 to $276.5 million in 2003 and by
$57.8 million increase in average non-taxable investment securities, from $13.7
million in 2002 to $71.5 million in 2003. The loan portfolio represented
approximately 34.1 percent of average interest earning-assets in 2003 as
compared with 32.2 percent in 2002. The increase in the volume of loans
primarily reflecting increases in commercial mortgage and residential mortgage
loans, and the increase in non-taxable investment securities
20
principally funded by increased levels of high yield savings deposits and short
term borrowings. The decline in average yield contributed $10.6 million to the
decrease in interest income offset in part by a $7.1 million increase
attributable to volume increases in interest earning-assets.
Interest income (fully tax-equivalent) increased by $2.2 million from 2001
to 2002 primarily due to an increase in the volume of interest earning-assets.
This volume increase contributed $7.7 million to the increase in interest income
offset in part by a $5.5 million decline attribute to reduced yields.
Interest expense for the year ended December 31, 2003 decreased as a result
of a decline in interest rates despite an increase in the volume of
interest-bearing demand deposits, time deposits and short-term borrowings. For
the year ended December 31, 2003, interest expense decreased $1.8 million or
12.37 percent as compared with 2002. Interest-bearing liabilities increased on
average $112.1 million, primarily in time deposits and short-term borrowings.
The decline in average rates contributed $4.9 million to the change in cost,
offset in part by a $3.1 million increase in cost of funds due to an increase in
the average volume of interest-bearing liabilities.
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 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 of
interest-bearing liabilities, 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.
The Corporation's net interest spread on a tax-equivalent basis (i.e., the
average yield on average interest-earning assets, calculated on a tax equivalent
basis, minus the average rate paid on interest-bearing liabilities) decreased 62
basis points to 2.78 percent from 3.40 percent for the year ended December 31,
2002. The decrease reflected a contraction of spreads between yields earned on
loans and investments and rates paid for supporting funds. During 2003 spreads
contracted due in part to monetary policy promulgated by the Federal Reserve
Open Market Committee maintaining the target Federal Funds Rate at a 44-year low
of 1.00 percent as a result of its last rate cut on June 25, 2003.
The Federal Reserve had lowered rates one time during 2003 for a total of 25
basis points and lowered rates one time in 2002 for a total of 50 basis points.
These actions by the Federal Reserve Open Market Committee resulted in rates
declining to the lowest levels in 45 years. The net interest spread increased 3
basis points in 2002 as compared with 2001, primarily as a result of the
decreased cost of interest-bearing liabilities. The years 2001 through 2003
generally reflected periods of falling interest rates.
The total cost of interest-bearing liabilities decreased to 1.83 percent, a
change of 67 basis points, for the year ended December 31, 2003, from 2.50
percent for the year ended December 31, 2002 which followed a change of 95 basis
points from 3.45 percent for the year ended December 31, 2001.
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 13 basis points during 2003 to
approximately 40 basis points on average as compared to 40 basis points on
average during the year ended December 31, 2002. During the comparable periods
of 2002 and 2001, there was a decrease of 18 basis points to 40 basis points on
average. The increased percentage of non-interest bearing funding sources in
2003 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, 2003, the average volume of investment
securities increased by $68.4 million to approximately $533.9 million, or 65.9
percent of average earning assets, as compared to 2002. At December 31, 2003,
the total investment portfolio amounted to $519.2 million, a decrease of $18.4
million from December 31, 2002. The decreased size of the investment portfolio
at December 31, 2003, largely reflects the implementation of the Corporation's
strategies initiated in the second and third quarters of 2003, which resulted
21
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
in the sale of approximately $99.9 million in mortgage-related securities during
the year, a portion of which was subsequently re-invested back into the
securities portfolio. At December 31, 2003, 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.
The tax-equivalent yield on investments decreased by 139 basis points to
4.16 percent from a yield of 5.55 percent during the year ended December 31,
2002. The 139 basis points decline in yield on the portfolio was attributable to
the impact of the low interest rate environment which resulted in the purchase
of lower coupon mortgage-related securities to replace, in certain cases, higher
yielding investments, which had matured, were prepaid, or were called.
Heightened prepayment speeds also contributed to the acceleration of the
downward repricing of yield on mortgage-related securities in the portfolio
during 2003. The impact of repricing activity on investment yields was increased
to some extent, for the year ended December 31, 2003, by the change in portfolio
mix and shortening of portfolio duration.
The volume related figures during the twelve month period ended December 31,
2003 contributed an increase in revenue of $3.990 million, while rate related
changes caused a decline in revenue of $7.625 million. 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 2002. The Corporation carried on average $12.91 million, in
short-term overnight money market and federal funds as compared with $15.96
million for the comparable twelve month period in 2002. These funds carried
significantly lower rates than other securities in the portfolio (on average
1.14 percent during 2003, compared to 1.82 earned on these overnight funds for
the comparable period in 2002.) and contributed to the decline in yield as
compared to 2002.
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 2003 approximately $131.7 million in securities were sold from the
Corporation's available-for-sale portfolio.
At December 31, 2003 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 $822,000 as compared with an unrealized net gain of
$2.2 million at December 31, 2002, resulting from a decline in interest rates
fostered by the Federal Open Market Committee's actions to continue to lower the
Federal Funds target rate as an economic stimulus. For additional information
regarding the Corporation's investment portfolio, see Note 4 to the Consolidated
Financial Statements.
LOANS
- -----
Loan growth during 2003 occurred in all principal categories of the loan
portfolio. At December 31, 2003 total loans amounted to $349.5 million, an
increase of 52.6 percent or $120.5 million as compared to the comparable
year-end in 2002. Loan growth during the year ended December 31, 2003 occurred
primarily in the residential 1-4 family home equity loans and commercial loan
portfolio. This growth resulted from the Corporation's business development
efforts, heightened visibility of its products and aggressive marketing
campaigns on its home equity, 7/1 adjustable rate residential mortgage and 10-
year residential mortgage loan products. The increased volume was also
attributable to the expansion in recent years by the Corporation of the bank's
branch network. The decrease in the loan portfolio yields for the twelve months
ended December 31, 2003, was the result of the decline in interest rates as
compared with 2002, coupled with a competitive rate pricing structure maintained
by the Corporation to attract new loans and further by the heightened
competition for lending relationships that exists in the Corporation's market.
The Corporation's desire to grow this segment of the earning-asset mix is
reflected in its current business development plan and marketing plans, as well
as its short-term strategic plan.
Average loan volume increased $53.6 million or 24.07 percent in 2003, while
portfolio yield decreased by 121 basis points as compared with the same period
in 2002. The increased total average loan volume was due
22
primarily to increased customer activity, new lending relationships and new
markets. The volume related factors during the period contributed increased
revenue of $3,213,000, offset in part by rate related changes, which amounted to
$2,962,000. Total average loan volume increased to $276.5 million with a net
interest yield of 5.47 percent, as compared to $222.8 million with a yield of
6.68 percent for the year ended December 31, 2002.
The decrease in the loan portfolio yields for the year 2003 was the result
of the prevailing low interest rate environment, a further decline in interest
rates as compared to 2002, and the heightened prepayment activity that occurred
throughout most of 2003. The effects of additions to the portfolio were lessened
by continued re-financing activity, which was fueled by historically low
interest rates. 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 2003, the level of the
allowance was $3,002,000 as compared to a level of $2,498,000 at December 31,
2002. The Corporation made a provision to the allowance for loan losses of
$522,000 in 2003, $360,000 in 2002 and $656,000 in 2001. The increase in the
provision for loan losses during 2003 was commensurate with the increase in loan
volume recorded during the year and the overall level of the allowance as a
percentage of total loans.
At December 31, 2003, the allowance for loan losses amounted to .86 percent
of total loans. In management's view, the level of the allowance at December 31,
2003 is adequate to cover losses inherent in the loan portfolio. Management's
judgment regarding the adequacy of the allowance constitutes a "Forward Looking
Statement" under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from management's analysis, based principally
upon the factors considered by management in establishing the allowance.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's allowance
for loan losses. Such agencies may require the Corporation to increase the
allowance based on their analysis of information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Future adjustments to the
allowance may be necessary due to economic factors impacting New Jersey real
estate as well as operating, regulatory and other conditions beyond the
Corporation's control. The allowance for loan losses as a percentage of total
loans amounted to .86 percent, 1.09 percent and 1.04 percent at December 31,
2003, 2002 and 2001, respectively.
During 2003, the Corporation did not experience any substantial problems
within its loan portfolio. Net charge-offs were $18,000 in 2003, $53,000 in 2002
and $120,000 in 2001. During 2003, the Corporation experienced a reduction in
the volume of charge-offs in the installment loan portfolio compared to 2002 and
2001 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 $26,000 at December 31,
2003, $229,000 at December 31, 2002 and $109,000 at December 31, 2001. The
decrease in non-accrual loans for 2003 was attributable to a decrease in
non-accrual fixed rate home equity loans, and personal loans, as compared to
December 31, 2002. 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
23
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
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, 2003, total impaired loans amounted to
$358,000 compared with $175,000 at December 31, 2002, and $1,859,000 at
December31, 2001. The reserves allocated to such loans in 2003, 2002 and 2001
were $6,000, $1,000 and $279,000, respectively. The increase in impaired loans
at December 31, 2003 as compared with 2002 is attributable to a downgrade in
rating to substandard from pass/watch of several related commercial line of
credit due to the bankruptcy of the borrowers largest customer, which may impact
the borrowers cash flows.
Although classified as substandard, the impaired loans were current with
respect to principal and interest payments.
FIVE YEAR STATISTICAL ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------
The following table reflects the relationship of loan volume, the
provision and allowance for loan losses and net charge-offs for the past five
years.
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Average loans outstanding $276,457 $ 222,819 $205,991 $185,846 $160,208
- -----------------------------------------------------------------------------------------------------
Total loans at end of period $349,525 $ 229,051 $211,236 $198,949 $169,089
- -----------------------------------------------------------------------------------------------------
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Balance at the beginning of year $ 2,498 $ 2,191 $ 1,655 $ 1,423 $ 1,326
Charge-offs:
Commercial 0 48 0 0 0
Installment loans 39 69 127 135 23
- -----------------------------------------------------------------------------------------------------
Total charge-offs 39 117 127 135 23
- -----------------------------------------------------------------------------------------------------
Recoveries:
Commercial 0 48 0 0 0
Installment loans 21 16 7 4 12
- -----------------------------------------------------------------------------------------------------
Total recoveries 21 64 7 4 12
- -----------------------------------------------------------------------------------------------------
NET CHARGE-OFFS: 18 53 120 131 11
=====================================================================================================
Provision for loan losses 522 360 656 363 108
=====================================================================================================
Balance at end of year $ 3,002 $ 2,498 $ 2,191 $ 1,655 $ 1,423
=====================================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.01% 0.02% 0.06% 0.07% 0.01%
=====================================================================================================
Allowance for loan losses as a percentage
of total loans at end of year 0.86% 1.09% 1.04% 0.83% 0.84%
=====================================================================================================
The 2003 and 2002 charge-offs of $39,000 and $69,000, 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.
24
It is generally the Corporation's policy to discontinue interest accruals
once a loan is past due as to interest or principal payments for a period of
ninety days. When a loan is placed on non-accrual, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to the loan's yield.
Accruing loans past due 90 days or more are generally well secured and in the
process of collection.
The following table sets forth, as of the dates indicated, the amount of the
Corporation's non-accrual loans, 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) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------
Non-accrual loans $26 $229 $109 $246 $292
Accruing loans past due 90 days or more 0 0 0 2 0
Other real estate owned 0 0 0 49 73
- --------------------------------------------------------------------------------
Total non-performing assets $26 $229 $117 $297 $365
================================================================================
Non-accrual loans at December 31, 2003 decreased $203,000 from the amount
reported at December 31, 2002, and were comprised of a consumer loan, a fixed
rate home equity loan and a commercial loan. The decrease in non- accrual loans
at December 31, 2003 was attributable to a decrease of $209,000 in non-accrual
fixed rate home equity loans and $15,000 in personal loans as compared to
December 31, 2002.
At December 31, 2003 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, 2003 and 2002.
NON-INTEREST INCOME
- -------------------
The following table presents the principal categories of non-interest income
for each of the years in the three-year period ended December 31, 2003.
AT DECEMBER 31,
- ----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 % CHANGE 2002 2001 % CHANGE
- ----------------------------------------------------------------------------------------------
Service charges, commissions and fees $1,683 $1,600 5.19 $1,600 $1,500 2.56
Other income 1,298 1,143 11.94 1,143 747 53.01
Gain on securities sold 266 592 (55.07) 592 181 227.07
- ----------------------------------------------------------------------------------------------
Total other non-interest income $3,247 $3,335 (2.64) $3,335 $2,488 34.04
==============================================================================================
For the year ended December 31, 2003, total other non-interest income,
exclusive of net gains on securities sold, reflects an increase of $238,000 or
an increase of 8.68 percent compared to the year ended December 31, 2002. The
increase in fees from the comparable period in 2002 was driven primarily fees
generated by lending activities, an increase of $54,578 or 21.3% as compared to
the comparable period in 2002. This amount includes loan servicing and mortgage
banking fees and letter of credit fees. Consistent levels of service charges
commissions and fees supported by increased customer activity resulted in
increased overdraft, ATM and debit card fees. Other income increased as a result
of an increase in the cash surrender value of bank owned life insurance, which
amounted to $798,000 or an increase of $37,000 for the year ended December 31,
2003 in comparison to $761,000 for the comparable period of 2002.
Fee income, comprised of service charges, commissions and fees, increased by
$83,000, attributable to higher levels of service charges, commissions, and
fees. Service charges increased primarily as a result of an increase in
25
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
business activity and an expanded customer account base.
During 2003, the Corporation recorded net gains of $266,000 on securities
sold from the available-for-sale investment portfolio compared to gains of
$592,000 and $181,000 recorded in 2002 and 2001. The sales were made in the
normal course of business and proceeds were re-invested into the securities
portfolio.
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, 2003.
AT DECEMBER 31,
- ---------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 % CHANGE 2002 2001 % CHANGE
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits $10,425 $ 9,452 10.29 $ 9,452 $ 7,807 21.07
Occupancy, net 1,835 1,644 11.62 1,644 1,509 8.95
Premises and equipment 1,708 1,600 6.75 1,600 1,486 7.67
Stationery and printing 559 583 (4.12) 583 468 24.57
Marketing and advertising 533 576 (7.47) 576 487 18.28
Other 3,276 3,343 (2.00) 3,343 3,459 (3.35)
- ---------------------------------------------------------------------------------------------
Total other non-interest expense $18,336 $17,198 6.62 $17,198 $15,216 13.03
=============================================================================================
Total non-interest expense increased $1.138 million or 6.62 percent in 2003
from 2002 as compared with an increase of $1.982 million or 13.03 percent from
2001 to 2002. The level of operating expenses during 2003 increased in several
expense categories. The year-to-year increase in operating 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 2.10 percent in 2003 compared to 2.30
percent in 2002 and 2.50 percent in 2001.
Salaries and employee benefits, which accounted for 85.5 percent of the
total increase in other non-interest expense, increased $973,000 or 10.3 percent
in 2003 over 2002. Salaries and employee benefits accounted for 56.9 percent of
total other non-interest expense in 2003, as compared to 55.0 percent and 51.3
percent for 2002 and 2001, respectively. This increase is primarily driven by a
need to attract, high caliber employees, in addition to normal merit increases,
promotional raises and higher benefit costs. Staffing levels overall increased
to 191 full-time equivalent employees at December 31, 2003 compared to 182
full-time equivalent employees at December 31, 2002 and 172 at December 31,
2001.
Occupancy and bank premise and equipment expenses for the year ended
December 31, 2003 increased $299,000 or 9.22 percent over 2002. This increase in
occupancy and bank premise and equipment expense in 2003 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 $249,000 or 8.3 percent in 2002 over 2001 was
also attributable to the increased costs of expanded bank facilities.
Stationery and printing expenses for the year decreased $24,000 or 4.12
percent compared to 2002. These costs increased $115,000 or 24.6 percent in 2002
from 2001, reflecting the increased costs associated with an expanded
infrastructure and branch network.
Marketing and advertising expenses for the year ended December 31, 2003
decreased $43,000 or 7.47 percent over the comparable twelve-month period in
2002. This decrease in marketing and advertising expense in 2003 is primarily
attributable to costs associated with the grand opening of the Town Hall Banking
Center in Morristown, New Jersey during 2002 and the promotion during the year
of deposit and loan products. These expenses increased $89,000 in 2002 when
compared with 2001 levels.
Effective January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill
and Intangible Assets"; under
26
which annual amortization of unamortized goodwill ceased. Accordingly there
was no amortization expense for 2003 or 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 decreased from 2002 to 2003,
primarily as a result of lower levels of taxable income bolstered 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, 2003, 2002 and 2001 were 15.34 percent, 31.74 percent and 33.05 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 increased by $3.255 million or 342.63 percent
from 2002 to 2003 and increased by $191,000 or 25.16 percent from 2001 to 2002.
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 $798,000,
$761,000 and $382,000 for 2003, 2002 and 2001, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
SFAS NO. 142
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. 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 intangible 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. 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 Statement
142. Accordingly, the December 31, 2002 and 2003 Financial Statements do not
include amortization of goodwill. For the year ended December 31, 2001,
amortization of goodwill totaled $323,000. If Statement 142 had been adopted on
January 1, 2001, net income for the year ended December 31, 2001 would have
increased $323,000. Accordingly, basic and diluted earnings per share would have
increased $.04 for the year ended December 31, 2001.
SFAS NO. 149
Statement of Financial Accounting Standards No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," was issued on April 30,
2003. The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement did not have a significant effect on the Corporation's consolidated
financial statements.
SFAS NO. 150
The Financial Accounting Standards Board (FASB) has issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". The Statement improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity.
27
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
The new Statement requires that those instruments be classified as liabilities
in statements of financial position.
Statement 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is a mandatory redeemable share,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type, which includes put options and forward purchase
contracts, involves instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets. The third are
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. Statement 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety.
In addition to its requirements for the classification and measurement of
financial instruments in its scope, Statement 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Statement 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The initial adoption of Statement 150 did not
have an impact on the Corporation's consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
- --------------------------------------------------------------------------------
FASB Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46") was issued in January 2003 and was reissued as FASB Interpretation
No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R
is applicable to all special-purpose entities (SPEs) in which the entity holds a
variable interest no later than the end of the first reporting period ending
after December 15, 2003. FIN 46 and FIN 46R may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. FIN
46 and FIN 46R provides guidance on the identification of entities controlled
through means other than voting rights. FIN 46 and FIN 46R specifies how a
business enterprise should evaluate its interest in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved.
The Company adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Company to
deconsolidate its investment in the subsidiary trusts formed in connection with
the issuance of trust preferred securities. In July 2003, the Board of Governors
of the Federal Reserve System instructed bank holding companies to continue to
include the trust preferred securities in their Tier 1 capital for regulatory
capital purposes until notice is given to the contrary. There can be no
assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of December 31, 2003, assuming the Company was not allowed to
include the $15.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital, the Company would remain "well capitalized." The
deconsolidation of the subsidiary trusts results in the Company reporting on its
statements of condition the subordinated debentures that have been issued from
Center Bancorp to the subsidiary trusts. The adoption of FIN 46 did not have a
significant effect on the Company's consolidated financial statements.
As of December 31, 2003, assuming the Corporation was not allowed to include
the $15 million in subordinated debentures issued by Center Bancorp Statutory
Trust I and Center Bancorp Statutory Trust II in Tier 1 capital the Corporation
would remain "Well Capitalized".
28
GUARANTOR'S ACCOUNTING AND DISCLOSURE
REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS
- ---------------------------------------------
In 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). The disclosure requirements of FIN 45 were
effective for the year ended December 31, 2002 and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee.
Significant guarantees that have been entered into by the Corporation
include standby letters of credits with a total of $14.2 million as of December
31, 2003. The adoption of FIN 45 did not have a material impact on the
consolidated financial statements.
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.
29
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
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.
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, 2003, and assuming that
Management does not take action to alter the outcome, the Corporation would
expect an increase of 3.92 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, 2003, the Corporation would expect a decrease of
3.24 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, 2003, the Corporation reflects a negative interest
sensitivity gap (or an interest sensitivity ratio of .70:1.00) at the cumulative
one-year position. During much of 2003, the Corporation had maintained a
negative interest sensitivity gap. The maintenance of a liability-sensitive
position during 2003 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 2004. However, no assurance can be given that this objective will be met.
30
The following table depicts the Corporation's interest rate sensitivity
position at December 31, 2003:
- ---------------------------------------------------------------------------------------------------------------------------------
EXPECTED MATURITY/PRINCIPAL REPAYMENT DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE YEAR YEAR YEAR YEAR YEAR 2009 ESTIMATED
INTEREST END END END END END AND TOTAL FAIR
(DOLLARS IN THOUSANDS) RATE 2004 2005 2006 2007 2008 THEREAFTER BALANCE VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING
ASSETS:
Loans 5.09% $135,880 $ 42,914 $ 49,358 $ 32,261 $ 33,709 $ 52,401 $346,523 $351,876
Investments 4.41% 182,179 76,169 69,750 45,435 58,568 87,133 519,234 524,074
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $318,059 $119,083 $119,108 $ 77,696 $ 92,277 $139,534 $865,757 $875,950
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES:
Time certificates of deposit of
$ 100,000 or greater 2.15% $ 53,622 $ 2,533 $ 107 $ 1,551 $ 432 $ 0 $ 58,245 $ 59,092
Time certificates of deposit of
less than $100,000 3.18% 48,873 19,606 2,461 12,745 442 0 84,127 85,770
Other interest bearing
deposits 0.91% 214,504 0 0 0 0 155,519 370,023 354,264
Subordinate Debentures 4.88% 0 0 10,000 0 0 5,000 15,000 14,962
Securities sold under
agreements to repurchase 0.85% $ 99,724 0 0 0 0 0 99,724 100,954
FHLB advances 3.32% 40,000 0 0 15,000 0 60,000 115,000 122,461
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $456,723 $ 22,139 $220,519 $ 22,139 $ 874 $220,519 $742,119 $737,503
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-earning
assets 318,059 437,142 556,250 633,946 726,223 865,757 865,757
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-bearing
liabilities 456,723 478,862 491,430 520,726 521,600 742,119 742,119
- ---------------------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap (138,664) 96,944 106,540 48,400 91,403 (80,985) 123,638
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative rate
sensitivity gap $(138,664) $(41,720) $ 64,820 $113,220 $204,623 $123,638 $123,638
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative gap ratio 0.70% 0.91 1.13% 1.22% 1.39% 1.17% 1.17%
=================================================================================================================================
The table above indicates the time period in which interest-earning assets
and interest-bearing liabilities will mature or may re-price in accordance with
their contractual terms. However, this table does not necessarily indicate the
impact of general interest rate movements on the Corporation's net interest
yield because the repricing of various categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
various assets and liabilities indicated as repricing within the same period may
in fact reprice at different times and at different rate levels.
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.
ESTIMATES OF FAIR VALUE
- -----------------------
The estimation of fair value is significant to a number of the Corporation's
assets, including trading account assets, loans held for sale, available for
sale investment securities, mortgage servicing rights ("MSR's"), other real
estate owned and other repossessed assets. These are all recorded at either fair
value or lower of cost or fair value. Fair values are volatile and may be
influenced by a number of factors. Circumstances that could cause estimates of
the fair value of certain assets and liabilities to change include a change in
prepayment speeds, discount rates,
31
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
or market interest rates. Fair values for trading account assets, most available
for sale investment securities and most derivative financial instruments are
based on quoted market prices. If quoted market prices are not available, fair
values are based on judgments regarding future expected loss experience, current
economic condition risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature, involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The financial statements and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the operations; unlike most industrial companies,
nearly all of the Corporation's assets and liabilities are monetary. As a
result, interest rates have a greater impact on performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
LIQUIDITY
- ---------
The liquidity position of the Corporation is dependent on successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise principally to accommodate possible
deposit outflows and to meet customers' requests for loans. 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, 2003, core deposits, as defined by the
Corporation (comprised of total demand and savings accounts plus money market
accounts under $100,000), represented 43.7 percent of total deposits, as
compared with 48.5% at December 31, 2002. More volatile rate sensitive deposits,
concentrated in certificates of deposit $100,000 and greater, increased to 9.2
percent of total deposits from 5.4 percent at December 31, 2002. This change was
due primarily to an increase in time deposits during 2003.
32
The following table depicts the Corporation's core deposit mix at December
31, 2003 and 2002:
CORE DEPOSIT MIX
- ----------------
DECEMBER 31,
----------------------------------------------------------
2003 2002 NET CHANGE
-------------------------------------------- VOLUME 2003
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE VS. 2002
- --------------------------------------------------------------------------------------------
Demand Deposits $120,526 43.6 $116,984 39.1 $ 3,542
Interest-Bearing Demand 62,514 22.6 82,351 27.5 (19,837)
Regular Savings 60,588 21.9 75,370 25.2 (14,782)
Money Market Deposits under $100 32,923 11.9 24,347 8.2 8,576
- --------------------------------------------------------------------------------------------
Total core deposits $276,551 100.0 $ 299,052 100.0 $(22,501)
- --------------------------------------------------------------------------------------------
Total deposits $632,921 $ 616,351 $ 16,570
- --------------------------------------------------------------------------------------------
Core deposits to total deposits 43.7% 48.5%
============================================================================================
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 2003 amounted to approximately $97.1
million, an increase of $15.8 million or 19.47 percent from 2002.
The following table is a summary of securities sold under repurchase
agreements for each of the last three years.
DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS:
Average interest rate:
At year end 0.88% 1.23% 2.35%
For the year 0.96% 1.63% 3.30%
Average amount outstanding during the year: $97,125 $81,297 $59,425
Maximum amount outstanding at any month end: $111,358 $85,110 $90,079
Amount outstanding at year end: $99,724 $75,431 $72,296
================================================================================
CASH FLOWS
- ----------
The consolidated statements of cash flows present the changes in cash and
cash equivalents from operating, investing and financing activities. During 2003
cash and cash equivalents (which decreased overall by $6.7 million) were
provided on a net basis by operating and financing activities and used on a net
basis in investing activities. Cash flows from operating activities, primarily
net income, and financing activities, primarily increases Federal Home Loan Bank
advances and short-term borrowings, were used in investing activities, primarily
the increased volume of investment securities, loans and property and equipment.
33
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
CONTRACTUAL COMMITMENTS
- -----------------------
The following table summarizes our contractual obligations at December 31,
2003 and the effect such obligations are expected to have on our liquidity and
cash flows in future periods.
TOTAL LESS THAN 1 1-3 4-5 AFTER 5
(DOLLARS IN THOUSANDS) YEAR YEARS YEARS YEARS
=======================================================================================================
CONTRACTUAL OBLIGATIONS
OPERATING LEASE OBLIGATIONS $ 3,002 $ 390 $ 1,271 $ 952 $ 389
- -------------------------------------------------------------------------------------------------------
Total Contracted Cost Obligations 3,002 390 1,271 952 389
- -------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES /LONG-TERM DEBT
- -------------------------------------------------------------------------------------------------------
Time Deposits 142,372 102,495 24,707 15,170 0
Federal Home Loan Bank Advances 115,000 40,000 0 15,000 60,000
Subordinated Debentures 15,000 0 10,000 0 5,000
- -------------------------------------------------------------------------------------------------------
Total Other Long-term Liabilities/
Long-term Debt 272,372 142,495 34,707 30,170 65,000
=======================================================================================================
OTHER COMMERCIAL COMMITMENTS -
OFF BALANCE SHEET
- -------------------------------------------------------------------------------------------------------
Letter of Credit 14,155 12,365 1,790 0 0
Other Commercial Commitments -
Off Balance Sheet 76,583 21,781 4,959 4,725 45,118
- -------------------------------------------------------------------------------------------------------
Total Other Commercial Commitments -
Off Balance Sheet $ 90,738 $34,146 $ 6,749 $ 4,725 $45,118
=======================================================================================================
For further information see Note 15 of Notes to Consolidated Financial
Statements.
STOCKHOLDERS' EQUITY
- --------------------
Stockholders' equity averaged $51.96 million during 2003, an increase of
$3.7 million or 7.7 percent, as compared to 2002. At December 31, 2003,
stockholders' equity totaled $54.2 million, an increase of $3.1 million from
December 31, 2002. Such increase resulted from a decrease of $1,362,000 of net
unrealized gains (net of tax) on securities available-for-sale and net increases
of $4,067,000 attributable to net income and issuance of common stock offset by
cash dividends paid. The Corporation's dividend reinvestment and optional stock
purchase plan contributed $421,000 in new capital during 2003. Book value per
share at year-end 2003 was $6.36 compared to $6.06 at year-end 2002. Tangible
book value at year-end 2003 was $6.11 compared to $5.81 at year end 2002.
As of December 31, 2003 the Corporation has purchased 52,000 common shares
at an average cost per share of $10.34 under the stock buyback program announced
on January 24, 2002 for the repurchase of up to 241,500 shares of the
Corporation's outstanding common stock. The repurchased shares were recorded as
Treasury Stock, which resulted in a decrease in 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.
34
RISK-BASED CAPITAL/LEVERAGE
- ---------------------------
At December 31, 2003, the Corporation's total Tier I capital (defined as
tangible stockholders' equity for common stock and Trust Preferred Capital
Securities) amounted to $66.3 million or 7.19 percent of total assets. The Tier
I leverage capital ratio at December 31, 2003 was 7.44 percent of total
quarterly average assets. Tier I capital excludes the effect of SFAS No. 115,
which amounted to $882,000 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, 2003. 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, 2003, the Corporation's Tier 1 and total
risk-based capital ratios were 13.22 percent and 13.81 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of December 31, 2003. For information on risk-based capital
and regulatory guidelines for the Corporation's bank subsidiary, see Note 10 to
the Consolidated Financial Statements.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the bank regulators
about capital components, risk weightings and other factors. As of December 31,
2003, management believes that each of the Bank and the Corporation meet all
capital adequacy requirements to which it is subject.
SUBORDINATED DEBENTURES
- -----------------------
On December 19, 2003 Center Bancorp Statutory Trust II a statutory business
trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $5.0 million
of MMCapS capital securities to investors due on January 23, 2034. The capital
securities qualify as Tier 1 capital. The trust loaned the proceeds of this
offering to the Corporation and received in exchange $5.0 million of the
Corporation's subordinated debentures. The subordinated debentures are
redeemable in whole or part, prior to maturity but after January 23, 2009. The
floating interest rate on the subordinate debentures is three-month libor plus
2.85% and reprices quarterly. The rate at December 31, 2003 was 3.99%.
On December 18, 2001 Center Bancorp Statutory Trust I, a statutory business
trust and wholly-owned subsidiary of Center Bancorp, Inc., issued $10.0 million
of floating rate capital trust pass through securities to investors due on
December 18, 2031. The capital securities have preference over the common
securities with respect to liquidation and other disturbances and qualify as
Tier 1 capital. The subordinated debentures are redeemable in whole or part,
prior to maturity but after December 18, 2006. The floating interest rate on the
subordinated debentures is three-month libor plus 3.60% and reprices quarterly.
The rate at December 31, 2003 was 4.74%.
The additional capital raised with respect to the issuance of the floating
rate capital pass through securities was used to bolster the Corporation's
capital and for general corporate purposes, including capital contributions to
Union Center National Bank. Additional information regarding the capital
treatment of these securities is contained herein on page 58.
For information regarding certain developments which could impact the
treatment of the Corporation's subordinated debentures for regulatory capital
purposes, see "Recent Accounting Pronouncements - Consolidation of Variable
Interest Entities."
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, 2003, the Corporation had
527 common stockholders of record. This does not include beneficial owners for
whom CEDE & Company or others act as nominees. On December 31, 2003, the closing
market bid and asked price was $19.62-$19.66, respectively.
35
CENTER BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS continued
- --------------------------------------------------------------------------------
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
2003 2002 DECLARED
- --------------------------------------------------------------------------------
HIGH LOW HIGH LOW
BID BID BID BID 2003 2002
- --------------------------------------------------------------------------------
Fourth Quarter $21.43 $16.22 $11.92 $9.50 $0.0090 $0.0850
Third Quarter $19.31 $14.80 $11.70 $9.08 $0.0090 $0.0850
Second Quarter $17.00 $13.53 $11.38 $9.79 $0.0085 $0.0850
First Quarter $14.48 $11.88 $13.36 $8.25 $0.0085 $0.0715
- --------------------------------------------------------------------------------
$ 0.35 $0.3265
================================================================================
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 restated to reflect the
2-for-1 common stock split declared April 15, 2003, distributed June 2, 2003 to
common shareholders of record May 19, 2003.
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.
36
AVERAGE STATEMENTS OF CONDITION WITH INTEREST AND AVERAGE RATES
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
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 $ 462,422 $18,013 3.90% $ 451,867 $ 24,903 5.51% $342,247 $ 22,236 6.50%
Non-taxable 71,504 4,205 5.88% 13,694 950 6.94% 10,968 759 6.92%
Federal funds sold and
securities purchased under
agreement to resell 0 0 0.00% 3,415 59 1.73% 6,771 331 4.89%
Loans, net of unearned
income: (2) 276,457 15,131 5.47% 222,819 14,880 6.68% 205,991 15,301 7.43%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 810,383 37,349 4.61% 691,795 40,792 5.90% 565,977 38,627 6.82%
===============================================================================================================================
NON-INTEREST EARNING ASSETS:
Cash and due from banks 21,720 18,901 17,293
Bank owned life insurance 14,390 13,738 11,598
Other assets 27,302 25,220 15,186
Allowance for possible
loan losses (2,664) (2,336) (1,865)
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest
earning assets 60,748 55,523 42,212
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 871,131 $ 747,318 $608,189
===============================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Money market deposits $ 94,579 1,024 1.08% $ 96,788 1,798 1.86% $ 78,878 2,042 2.59%
Savings deposits 153,856 1,877 1.22% 168,930 3,502 2.07% 118,209 3,438 2.91%
Time deposits 147,941 3,881 2.62% 103,772 3,218 3.10% 98,710 4,529 4.59%
Other interest-bearing
deposits 70,522 391 .55% 65,096 703 1.08% 48,590 672 1.38%
Short term borrowings
and FHLB advances 216,615 5,058 2.34% 137,013 4,738 3.46% 119,565 5,304 4.44%
Subordinated debentures 10,151 495 4.88% 10,000 563 5.63% 384 22 5.60%
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 693,664 12,726 1.83% 581,599 14,522 2.50% 464,336 16,007 3.45%
===============================================================================================================================
NON-INTEREST-BEARING LIABILITIES:
Demand deposits 120,607 110,896 95,213
Other non-interest bearing
deposits 422 603 964
Other liabilities 4,479 5,962 4,971
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing
liabilities 125,508 117,461 101,148
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 51,959 48,258 42,705
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 871,131 $ 747,318 $608,189
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income
(tax-equivalent basis) $24,623 $ 26,270 $ 22,620
- -------------------------------------------------------------------------------------------------------------------------------
Net interest spread 2.78% 3.40% 3.37%
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning assets (margin) 3.04% 3.80% 4.00%
- -------------------------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (3) (1,430) (323) (258)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $23,193 $ 25,947 $ 22,362
===============================================================================================================================
(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.
37
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 3) $ 16,509 $ 23,220
Investment securities held to maturity (approximate market
value of $159,989 in 2003 and $219,921 in 2002) 155,149 214,902
Investment securities available-for-sale 364,085 322,717
- -------------------------------------------------------------------------------------------------
Total investment securities (Note 4 and 7) 519,234 537,619
Loans, net of unearned income (Note 5 and 7) 349,525 229,051
Less - Allowance for loan losses (Note 5) 3,002 2,498
- -------------------------------------------------------------------------------------------------
Net loans 346,523 226,553
Premises and equipment, net (Note 6) 15,610 12,976
Accrued interest receivable 4,485 4,439
Bank owned separate account life insurance (Note 1) 14,614 14,143
Other assets (Note 9) 2,758 2,395
Goodwill (Note 2) 2,091 2,091
- -------------------------------------------------------------------------------------------------
Total assets $921,824 $823,436
=================================================================================================
LIABILITIES
DEPOSITS
Non-interest bearing $120,526 $116,984
Interest bearing:
Certificates of deposit $100,000 and over 58,245 33,396
Savings and time deposits 454,150 465,971
- -------------------------------------------------------------------------------------------------
Total deposits 632,921 616,351
Federal funds purchased and securities sold under agreements to
repurchase (Note 7) 99,724 75,431
Federal Home Loan Bank advances (Note 7) 115,000 65,000
Subordinated debentures (Note 11) 15,000 10,000
Accounts payable and accrued liabilities (Notes 8 and 9) 4,999 5,600
- -------------------------------------------------------------------------------------------------
Total liabilities 867,644 772,382
- -------------------------------------------------------------------------------------------------
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 9,527,219 and 9,499,114
shares in 2003 and 2002 respectively 19,405 18,984
Additional paid in capital 4,677 4,562
Retained earnings 33,268 29,863
Treasury stock at cost (1,008,703 and 1,078,404 shares in 2003 and
2002 respectively) (3,978) (4,254)
Restricted stock (Note 8) (14) (285)
Accumulated other comprehensive income 822 2,184
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 54,180 51,054
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $921,824 $823,436
=================================================================================================
All per common share amounts have been adjusted retroactively for common stock
splits and common stock dividends during the periods presented.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER31,
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $15,131 $14,880 $15,301
Interest and dividends on investment securities:
Taxable interest income 17,097 24,199 21,334
Non-taxable interest income 2,775 627 501
Dividends 916 704 902
Interest on Federal funds sold and securities purchased
under agreement to resell 0 59 331
- ------------------------------------------------------------------------------------------------
Total interest income 35,919 40,469 38,369
- ------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on certificates of deposit $100,000 and over 461 472 1,465
Interest on other deposits 6,712 8,749 9,216
Interest on borrowings 5,553 5,301 5,326
- ------------------------------------------------------------------------------------------------
Total interest expense 12,726 14,522 16,007
- ------------------------------------------------------------------------------------------------
Net interest income 23,193 25,947 22,362
Provision for loan losses (Note 5) 522 360 656
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 22,671 25,587 21,706
- ------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges, commissions and fees 1,683 1,600 1,560
Other income 1,298 1,143 747
Gain on securities sold (Note 4) 266 592 181
- ------------------------------------------------------------------------------------------------
Total other income 3,247 3,335 2,488
- ------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits (Note 8) 10,425 9,452 7,807
Occupancy, net (Note 15) 1,835 1,644 1,509
Premises and equipment (Notes 6 and 15) 1,708 1,600 1,486
Stationery and printing 559 583 468
Marketing and advertising 533 576 487
Other 3,276 3,343 3,459
- ------------------------------------------------------------------------------------------------
Total other expense 18,336 17,198 15,216
- ------------------------------------------------------------------------------------------------
Income before income tax expense 7,582 11,724 8,978
Income tax expense (Note 9) 1,163 3,721 2,967
- ------------------------------------------------------------------------------------------------
Net income $ 6,419 $ 8,003 $ 6,011
- ------------------------------------------------------------------------------------------------
EARNINGS PER SHARE: (NOTE 1)
Basic $ .76 $ .95 $ .75
Diluted $ .75 $ .95 $ .72
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 8,475,394 8,393,482 8,273,564
Diluted 8,564,147 8,460,964 8,342,516
- ------------------------------------------------------------------------------------------------
All per common share amounts have been adjusted retroactively for common stock
splits and common stock dividends during the periods presented.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
CENTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS) YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
- -------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED TOTAL
COMMON ADDITIONAL OTHER STOCK-
STOCK PAID IN RETAINED TREASURY RESTRICTED COMPREHENSIVE HOLDERS'
AMOUNT CAPITAL EARNINGS STOCK STOCK INCOME (LOSS) EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $11,015 $ 4,049 $28,308 $(4,474) $ (56) $ 340 $39,182
- -------------------------------------------------------------------------------------------------------------------------------
YEAR 2001
Cash dividend (2,338) (2,338)
Common stock dividend 3,407 (3,412) (5)
Issuance of common stock 255 255
Exercise of stock options 131 359 490
Restricted stock award (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 $14,677 $ 4,180 $28,569 $(4,115) $ (135) $ 1,120 $44,296
- -------------------------------------------------------------------------------------------------------------------------------
YEAR 2002
Cash dividend (2,747) (2,747)
Common stock dividend 3,970 (3,962) 8
Issuance of common stock 337 337
Exercise of stock options 212 312 524
Restricted stock award 170 87 (150) 107
Repurchase of common stock (538) (538)
Comprehensive income:
Net income 8,003 8,003
Unrealized holding gains on
securities arising during the
period (net of taxes of 1,456
($664))
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 $18,984 $ 4,562 $29,863 $(4,254) $ (285) $ 2,184 $51,054
- -------------------------------------------------------------------------------------------------------------------------------
YEAR 2003
Cash dividend (3,014) (3,014)
Common stock split 0
Issuance of common stock 421 421
Exercise of stock options 115 276 391
Restricted stock award 271 271
Comprehensive income:
Net income 6,419 6,419
Unrealized holding losses on
securities arising during the
period (net of tax benefit of $611) (1,186)
Less reclassification
adjustment
for gains included in net
income (net of tax of $90) 176
Net unrealized holding loss on
securities arising during the
period (net of tax benefit of $701) (1,362) (1,362)
Total comprehensive income 5,057
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 $19,405 $ 4,677 $33,268 $(3,978) $ (14) $ 822 $54,180
- -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,419 $ 8,003 $ 6,011
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,412 1,494 1,894
Provision for loan losses 522 360 656
Provision for deferred taxes (411) (46) (286)
Gains on sale of investment securities available-for-sale (266) (592) (181)
(Increase) decrease in accrued interest receivable (46) 103 1,297
Increase in other assets (423) (1,199) (641)
(Decrease) increase in other liabilities (601) 427 1,365
Proceeds from the sale of other real estate owned 0 0 45
Loss on the sale of other real estate owned 0 0 4
Amortization of premium and accretion of
discount on investment securities, net 6,054 1,982 84
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,660 10,532 10,248
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities available-for-sale 210,565 213,314 119,742
Proceeds from maturities of investment securities held to maturity 137,337 149,286 98,670
(Purchase) redemption of FHLB and FRB Stock (2,840) (600) 310
Proceeds from sales of investment securities available-for-sale 131,722 44,338 27,660
Purchase of securities available-for-sale (387,965) (369,846) (204,607)
Purchase of securities held to maturity (77,584) (157,363) (127,905)
Net increase in loans (120,492) (17,815) (12,407)
Property and equipment expenditures, net (),046 (2,630) (3,211)
Purchase of bank owned life insurance 0 0 (13,000)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (113,303) (141,316) (114,748)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 16,570 118,518 72,537
Net increase in borrowings 24,293 3,135 21,034
Increase in FHLB advances 50,000 5,000 10,000
Dividends paid (3,014 (2,747) (2,338)
Proceeds from issuance of common stock 1,083 968 661
Issuance of subordinate debentures 5,000 0 10,000
Repurchase of common stock 0 (538) 0
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 93,932 124,336 111,894
- -----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (6,711) (6,448) 7,394
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 23,220 29,668 22,274
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $16,509 $23,220 $29,668
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits and short term borrowings $12,423 $14,440 $16,005
Income taxes $ 2,022 $ 4,364 $ 2,750
- -----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp, Inc. (the
Corporation) are prepared on the accrual basis and include the accounts of the
Corporation and its wholly owned subsidiary, Union Center National Bank (the
Bank). 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.
ESTIMATES
Center Bancorp's accounting policies conform to accounting principles
generally accepted in the United States and prevailing practices within the
financial industry. Management must make certain estimates and judgments when
determining the amounts presented in its Consolidated Financial Statements and
related notes. If these same estimates prove inaccurate, actual results could
differ from those reported.
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 and, are reported at fair value with unrealized gains
and losses included in earnings; and (3) available-for-sale securities, which do
not meet the criteria of the other two categories, and 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.
42
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.
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.
43
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued
PENSION PLAN
The Corporation has a non-contributory pension plan covering all eligible
employees. The Corporation's policy is to fund at least the minimum contribution
required by the Employee Retirement Income Security Act of 1974. The costs
associated with the plan are accrued based on actuarial assumptions and included
in non-interest expense.
STOCK BASED COMPENSATION
At December 31, 2003 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 DECEMBER31,
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- --------------------------------------------------------------------------------
Net income, as reported $6,419 $8,003 $6,011
- --------------------------------------------------------------------------------
Add: compensation expense recognized for
restricted stock award, net of related $ 9 $ 179 $ 81
tax effect
Deduct: Total Stock-based employee
compensation expense determined under
fair value based method all awards,
net of related tax effects 61 236 103
- --------------------------------------------------------------------------------
Pro forma net income $6,367 $7,946 $5,989
- --------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $.76 $.95 $.73
- --------------------------------------------------------------------------------
Basic - pro forma $.75 $.95 $.72
- --------------------------------------------------------------------------------
Diluted - as reported $.75 $.95 $.72
- --------------------------------------------------------------------------------
Diluted - pro forma $.74 $.94 $.72
================================================================================
EARNINGS PER SHARE
All common share and per common share amounts have been restated to reflect
the two-for-one common stock split distributed on June 2, 2003 and 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.
44
Earnings per common share have been computed based on the following:
YEARS ENDED DECEMBER31,
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- --------------------------------------------------------------------------------
Net income $6,419 $8,003 $6,011
- --------------------------------------------------------------------------------
Average number of common shares outstanding 8,475 8,393 8,274
Effect of dilutive options 86 60 53
Effect of restricted stock awards 3 8 16
Average number of common shares outstanding
used to calculate diluted earnings per
common share 8,564 8,461 8,343
- --------------------------------------------------------------------------------
Net income per share
Basic $.76 $.95 $.73
Diluted $.75 $.95 $.72
================================================================================
TREASURY STOCK
As of December 31, 2003 the Corporation has purchased 52,000 common shares
at an average cost per share of $10.34 under the stock buyback program announced
on January 24, 2002 for the repurchase of up to 241,500 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.
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 2003, 2002, and 2001
is presented in the Consolidated Statements of Changes in Stockholders' Equity.
TWELVE MONTHS ENDED DECEMBER31,
-------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
Net income $6,419 $8,003 $6,011
- --------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized holding (losses) gains arising
during the period, net of taxes (1,186) 1,456 899
Less reclassification adjustments for gains
included in net income (net of taxes) (176) (392) (119)
- --------------------------------------------------------------------------------
Other total comprehensive (loss) income (1,362) 1,064 780
Total comprehensive income $5,057 $9,067 $6,791
================================================================================
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
other income and amounted to $798,000 in 2003, $761,000 in 2002 and $382,000 in
2001.
RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated financial
statements for 2002 and 2001 to conform to the classifications presented in
2003.
45
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------
SFAS NO. 142
In July 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. 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 intangible 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. 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 Statement
142. Accordingly, the December 31, 2002 and 2003 Financial Statements do not
include amortization of goodwill. For the year ended December 31, 2001,
amortization of goodwill totaled $323,000. If Statement 142 had been adopted on
January 1, 2001, net income for the year ended December 31, 2001 would have
increased $323,000. Accordingly, basic and diluted earnings per share would have
increased $.04 for the year ended December 31, 2001.
SFAS NO. 149
Statement of Financial Accounting Standards No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," was issued on April 30,
2003. The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement did not have a significant effect on the Corporation's consolidated
financial statements.
SFAS NO. 150
The Financial Accounting Standards Board (FASB) has issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." The Statement improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position.
Statement 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is a mandatory redeemable share,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type, which includes put options and forward purchase
contracts, involves instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets. The third are
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. Statement 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety.
In addition to its requirements for the classification and measurement of
financial instruments in its scope, Statement 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Statement 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The initial adoption of Statement 150 did not
have an impact on the Corporation's consolidated financial statements.
46
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
FASB Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN 46") was issued in January 2003 and was reissued as FASB Interpretation
No. 46 (revised December 2003) (FIN 46R). For public entities, FIN 46 or FIN 46R
is applicable to all special-purpose entities (SPEs) in which the entity holds a
variable interest no later than the end of the first reporting period ending
after December 15, 2003. FIN 46 and FIN 46R may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. FIN
46 and FIN 46R provides guidance on the identification of entities controlled
through means other than voting rights. FIN 46 and FIN 46R specifies how a
business enterprise should evaluate its interest in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved.
The Company adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Company to
deconsolidate its investment in the subsidiary trusts formed in connection with
the issuance of trust preferred securities. In July 2003, the Board of Governors
of the Federal Reserve System instructed bank holding companies to continue to
include the trust preferred securities in their Tier 1 capital for regulatory
capital purposes until notice is given to the contrary. There can be no
assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of December 31, 2003, assuming the Company was not allowed to
include the $15.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital; the Company would remain "well capitalized." The
deconsolidation of the subsidiary trusts results in the Company reporting on its
statements of condition the subordinated debentures that have been issued from
Center Bancorp to the subsidiary trusts. The adoption of FIN 46 did not have a
significant effect on the Company's consolidated financial statements.
As of December 31, 2003, assuming the Corporation were not allowed to
include the $15 million in subordinated debentures issued by Center Bancorp
Statutory Trust I and Center Bancorp Statutory Trust II in Tier 1 capital the
Corporation would remain "Well Capitalized".
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS
In 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). The disclosure requirements of FIN 45 were
effective for the year ended December 31, 2002 and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. Significant guarantees that have been entered into by the Corporation
include standby letters of credits with a total of $14.2 million as of December
31, 2003. The adoption of FIN 45 did not have a material impact on the
consolidated financial statements.
NOTE 3: CASH AND DUE FROM BANKS
- -------------------------------
The subsidiary bank, Union Center National Bank, maintained cash balances
reserved to meet regulatory requirements of the Federal Reserve Board of
approximately $72,000 and $563,000 at December 31, 2003 and 2002, respectively.
47
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,
2003 and 2002.
DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------
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 $64,210 $1,009 $368 64,851
Obligations of U.S. states and political
subdivisions 43,771 1,117 346 44,542
FHLB Stock and Other equity securities 47,168 3,448 20 50,596
- -------------------------------------------------------------------------------------------
$155,149 $5,574 $734 $159,989
===========================================================================================
DECEMBER 31, 2003
- -------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. government and federal agency obligations $205,596 $ 401 $1,569 $204,428
Obligations of U.S. states and political
subdivisions 55,740 508 628 55,620
Other securities 33,697 2,424 0 36,121
FHLB Stock and other equity securities 67,805 322 211 67,916
- -------------------------------------------------------------------------------------------
$362,838 $3,655 $2,408 $364,085
===========================================================================================
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
subdivisions 28,696 850 58 29,488
FHLB Stock and other equity securities 60,300 2,779 246 62,833
- -------------------------------------------------------------------------------------------
$214,902 $5,491 $472 $219,921
===========================================================================================
DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE:
U.S. government and federal agency obligations $193,118 $1,320 $318 $194,120
Obligations of U.S. states and political
subdivisions 7,339 440 0 7,779
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
===========================================================================================
A portion of the Corporation's investment securities are classified as
available-for-sale, approximately 68.6% at December 31, 2003. The
available-for-sale securities are reported at fair value with unrealized gains
or losses included in equity. Accordingly, the carrying value of such securities
reflects their fair value at the balance sheet
48
##
date. Fair value is based on quoted market price. The remainder of the portfolio
is classified as held to maturity and reported at amortized cost.
The following table presents information for investments in securities held to
maturity and securities available-for-sale at December 31, 2003, based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due to prepayment or early call options of the issuer. 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
- --------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
Due in one year or less $ 6,996 $ 7,162 $ 68,000 $ 67,789
Due after one year through five years 21,199 22,432 25,380 26,320
Due after five years through ten years 24,189 24,984 82,410 82,919
Due after ten years 102,765 105,411 187,048 187,057
- --------------------------------------------------------------------------------
Total $155,149 $159,989 $362,838 $364,085
================================================================================
During 2003, securities sold from the Corporation's available-for-sale
portfolio amounted to approximately $131.7 million. The gross realized losses on
securities sold amounted to $917,170, while the gross realized gains amounted to
$1.2 million in 2003. Securities sold from the Corporation's available-for-sale
portfolio during 2002 amounted to $44.3 million with a gross realized gain of
$1.1 million and gross realized losses of $536,615. Securities sold from the
Corporation's available-for-sales portfolio during 2001 amounted to $27.7
million with a gross realized loss of $138,741 and a gross realized gain of
$319,541. These securities were sold in the ordinary course of business.
TEMPORARILY IMPAIRED INVESTMENTS
Investments whose value is considered to be other than temporarily impaired
are written down to fair value as a charge to realized losses. The cost basis of
these written down investments is adjusted to fair value at the date the
determination of impairment is made. The new cost basis is not adjusted for
subsequent recoveries in value. At December 31, 2003 there were no securities
that reflected other than temporary impairment and as such no write-downs
occurred during 2003.
We review all securities for potential recognition of other than temporary
impairment. We maintain a watch list for the identification and monitoring of
securities experiencing problems that required a heightened level of review.
This could include credit rating downgrades.
Our assessment of whether an investment in the portfolio is other than
temporary include factors such as whether the issue has defaulted on scheduled
payments, announced restructuring and or filed for bankruptcy, has disclosed
severe liquidity problems that cannot be resolved, disclosed deteriorating
financial condition or sustained significant losses.
Factors affecting the market price include credits risk, market risk,
interest rates, economic cycles, and liquidity risk. The magnitude of any
unrealized loss may be affected by the relative concentration of our investments
in any one issuer or industry. We have established policies to reduce exposure
through diversification of concentration of the investment portfolio and
included limits on concentrations to any one issuer. We believe the investment
portfolio is prudently diversified.
At December 31, 2003, there were 114 investment grade investment securities
in the portfolio with unrealized loss positions of $2.9 million for 12 months or
less (including 111 issues that have unrealized losses that are less than 5% of
cost). The individual issues related to the respective categories presented in
the table on page 50 were as follows, 8 issues were comprised of U.S. Treasury
and Federal Agency Notes, 34 issues were comprised of Federal Agency CMOs, 1
issue was a corporate fixed rate bond, 3 issues were comprised of Federal Agency
MBS securities, and 68 issues were comprised of tax- exempt municipal bonds. The
FHLB Stock and other equity security category is comprised of stock in the
Federal Home Loan Bank of New York, Federal Reserve Bank of New York and money
market mutual funds.
49
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 4: INVESTMENT SECURITIES continued
The decline in value is related to a change in interest rates and subsequent
change in credit spreads required for these issues affecting market price. All
issues are performing and are expected to continue to perform in accordance with
their respective contractual terms and conditions. Short to intermediate average
durations and in certain cases monthly principal payments should reduce further
market value exposure to increases in rates.
At December 31, 2003 there was one investment security that had an
unrealized loss, $1,215, greater than 12 months. The issue was a Federal Agency
Callable Note. The note is callable in April of 2004 or if not called by the
issuer subject to an increase in its coupon rate. The decline in value is
related to a change in interest rates an increase in required credit spreads for
these securities affecting the market price. This security has performed, and is
expected to continue to perform, in accordance with its original contractual
terms. The intermediated maturity date of the security and related coupon option
should reduce further market value exposure to increases in rates.
In determining that the securities giving rise to the previously mentioned
unrealized losses were not other than temporary, we evaluated the factors cited
above, which we consider when assessing whether a security is other than
temporarily impaired. In making these evaluations, we must exercise considerable
judgment. Accordingly there can be no assurance that the actual results will not
differ from our judgments and that such differences may require the future
recognition of other-than-temporary impairment charges that could have a
material affect on our financial position and results of operations. In
addition, the value of, and the realization of any loss on, an investment
security is subject to numerous risks as cited above.
TEMPORARILY IMPAIRED INVESTMENT SUMMARY
- ---------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER
- ---------------------------------------------------------------------------------------------------
TOTAL TOTAL
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- ---------------------------------------------------------------------------------------------------
US Treasury obligations and
direct obligations of
US government $ 17,479 $ (547) $ 15,477 $ (546) $2,002 $(1)
Federal agency CMO's 107,000 (1,320) 107,000 (1,320) 0 0
Federal agency mortgage
backed securities 13,656 (70) 13,656 (70) 0 0
Corporate Bonds 2,980 (20) 2,980 (20) 0 0
Municipal Tax Exempt 46,647 (974) 46,647 (974) 0 0
FHLB Stock and other
equity securities 67,594 (211) 67,594 (211) 0 0
- ---------------------------------------------------------------------------------------------------
Total temporarily
impaired securities $255,356 $(3,142) $253,354 $(3,141) $2,002 $(1)
===================================================================================================
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, 2003 and 2002, respectively:
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
Real estate-residential mortgage $214,482 $119,674
Real estate-commercial 98,444 73,723
Commercial and industrial 28,863 30,758
Installment 7,736 4,707
All other 0 189
- --------------------------------------------------------------------------------
Total $349,525 $229,051
================================================================================
50
At December 31, 2003 and 2002 loans to officers and directors aggregated
approximately $4,283,000 and $3,868,000 respectively. During the year ended
December 31, 2003, the Corporation made new loans to officers and directors in
the amount of $2,975,000; payments by such persons during 2003 aggregated
$2,560,000. Management is of the opinion that the above loans were made on the
same terms and conditions as those prevailing for comparable transactions with
non-related borrowers.
A summary of the activity in the allowance for loan losses is as follows:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
Balance at the beginning of year $2,498 $2,191 $1,655
Provision for loan losses 522 360 656
Loans charged-off (39) (117) (127)
Recoveries on loans previously charged-off 21 64 7
- --------------------------------------------------------------------------------
Balance at the end of year $3,002 $2,498 $2,191
================================================================================
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, 2003, 2002 and 2001 were as follows:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
Loans past due in excess of 90 days and still
accruing $ 0 $ 0 $ 8
Non-accrual loans 26 229 109
Other real estate owned 0 0 0
- --------------------------------------------------------------------------------
Total non-performing assets $ 26 $229 $117
================================================================================
The amount of interest income that would have been recorded on non-accrual
loans in 2003, 2002 and 2001 had payments remained in accordance with the
original contractual terms approximated $1,700, $11,000 and $1,000 respectively,
while no interest income was received on these types of assets in 2003, 2002 and
2001.
At December 31, 2003, total impaired loans were approximately $358,000
compared to $175,000 at December 31, 2002 and $1,859,000 at December 31, 2001.
The reserves allocated to such loans in 2003, 2002 and 2001 were $6,000, $1,000
and $279,000. Although classified as substandard at December 31, 2003, the
impaired loans were current with respect to principal and interest payments. The
Corporation's total average impaired loans were $377,000 during 2003, $1,835,000
during 2002 and $1,897,000 during 2001. Interest income on impaired loans
totaled $22,000 in 2003, $156,000 in 2002 and $161,000 in 2001.
At December 31, 2003, 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 provisions for loan
losses are provided for all known and inherent risks. Collateral and/or personal
guarantees are required for virtually all loans.
51
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 6: BANK PREMISES AND EQUIPMENT
- -----------------------------------
Bank premise and equipment are summarized as follows:
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
Land $3,447 $2,403
Buildings 10,355 8,394
Furniture, fixtures and equipment 12,487 11,914
Leasehold improvements 1,457 1,457
================================================================================
Subtotal 27,746 24,168
- --------------------------------------------------------------------------------
Less accumulated depreciation and amortization 12,136 11,192
- --------------------------------------------------------------------------------
Total $15,610 $12,976
================================================================================
Depreciation expense for the three years ended December 31, 2003 amounted to
$1,412,151 in 2003, $1,338,530 in 2002 and $1,276,465 in 2001, respectively.
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
At December 31, 2003 and 2002, advances from the Federal Home Loan Bank of
New York (FHLB) amounted to $115,000,000 and $65,000,000, respectively. The FHLB
advances had a weighted average interest rate of 3.50 percent and 5.32 percent
at December 31, 2003 and December 31, 2002, 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, 2003, and 2002
are contractually scheduled for repayment as follows:
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
2010 $50,000 $50,000
2011 10,000 10,000
2012 5,000 5,000
2113 50,000 0
- --------------------------------------------------------------------------------
Total $115,000 $65,000
================================================================================
Other borrowings consisting of securities sold under agreements to
repurchase had average balances of $97,125,000, $72,909,000, and $59,425,000,
for the years ended December 31, 2003, 2002 and 2001, respectively. The maximum
amount outstanding at any month end during 2003, 2002 and 2001, respectively,
was $111,358,000, $85,110,000 and $90,079,000. The average interest rate paid on
securities sold under agreements to repurchase were 0.96%, 1.63%, and 3.30% for
the years ended December 31, 2003, 2002 and 2001, 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 2003, $63,000 for
2002 and $70,200 in 2001, and is included in non-interest expense.
52
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, 2003 and 2002.
CHANGE IN BENEFIT OBLIGATION (DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
Projected benefit obligation at beginning of year $7,660 $6,348
Service cost 660 476
Interest cost 507 450
Actuarial loss 630 634
Benefits paid (330) (248)
- --------------------------------------------------------------------------------
Projected benefit obligation at end of year $9,127 $7,660
================================================================================
CHANGE IN PLAN ASSETS
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning year $4,393 $4,477
Actual return on plan assets 810 (443)
Employer contributions 600 607
Benefits paid (330) (248)
- ------------------------------------------------------ -------------------------
Fair value of plan assets at end of year $5,473 $4,393
====================================================== =========================
Funded status $(3,654) $(3,267)
Unrecognized net asset 0 0
Unrecognized prior service cost 66 81
Unrecognized net actuarial loss 1,841 1,793
- --------------------------------------------------------------------------------
Accrued benefit cost $(1,747) $(1,393)
================================================================================
The net periodic pension cost for 2003, 2002 and 2001 includes the following
components.
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $676 $476 $373
Interest cost 507 450 414
Expected return on plan assets (386) (383) (377)
Net amortization and deferral 157 46 (18)
- --------------------------------------------------------------------------------
Net periodic pension expense $954 $589 $392
================================================================================
The following table presents the assumptions used to calculate the projected
benefit obligation in each of the last three years.
2003 2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 7.25%
Rate of compensation increase 4.75% 5.25% 5.75%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
================================================================================
The following information is provided.
AT DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002
- -------------------------------------------------------------------------------
INFORMATION FOR PLANS WITH AN ACCUMULATED
BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS
- -------------------------------------------------------------------------------
Projected benefit obligation $9,127 $7,660
Accumulated benefit obligation 6,777 5,530
Fair value of plan assets 5,473 4,393
- --------------------------------------------------------------------------------
ASSUMPTIONS
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
BENEFIT OBLIGATION AT DECEMBER 31
- --------------------------------------------------------------------------------
Discount rate 6.25% 6.75%
Rate of compensation increase 4.75% 5.25%
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
NET PERIODIC BENEFIT COST FOR YEARS ENDED DECEMBER
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.25%
Expected long-term return on plan assets 8.00% 8.00%
Rate of compensation increase 5.25% 5.75%
- --------------------------------------------------------------------------------
53
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 8: PENSION AND BENEFITS continued
The process of determining the overall expected long-term rate of return on
plan assets begins with a review of appropriate investment data, including
current yields on fixed income securities, historical investment data,
historical plan performance and forecasts of inflation and future total returns
for the various asset classes. This data forms the basis for the construction of
a best-estimate range of real investment return for each asset class. An
average, weighted real-return range is computed reflecting the Plan's expected
asset mix, and that range, when combined with an expected inflation range
produces an overall best-estimate expected return range. Specific factors such
as the Plan's investment policy, reinvestment risk and investment volatility are
taken into consideration during the construction of the best estimate real
return range, as well as in the selection of the final return assumption from
within the range.
PLAN ASSETS
The Union Center National Bank Pension Trust's weighted-average asset
allocation at December 31, 2003, and 2002, by asset category, is as follows:
ASSET CATEGORY 2003 2002
- --------------------------------------------------
Equity securities 79% 72%
Debt and/or Fixed Income Securities 20% 26%
Real Estate 0% 0%
Other 1% 2%
- --------------------------------------------------
Total 100% 100%
==================================================
The general investment policy of the Pension Trust is for the fund to
experience growth in assets that will allow the market value to exceed the value
of benefit obligations over time. Appropriate diversification on a total fund
basis is achieved by following an allowable range of commitment within asset
category, as follows;
ASSET CATEGORY RANGE TARGET
- --------------------------------------------------
Equity securities 15-80% 75%
Debt and/or Fixed Income Securities 20-65% 25%
International Equity 0-10% 0%
Short Term 0-40% 0-5%
The investment manager is not authorized to purchase, acquire or otherwise
hold certain types of market securities (subordinate bonds, commodities, real
estate investment trusts, limited partnerships, naked puts, naked calls, stock
index futures, oil gas or mineral exploration ventures, unregistered securities)
or to employ certain types of market techniques (margin purchases, short sales)
or to mortgage, pledge, hypothecate, or in any manner transfer as security for
indebtedness, any security owned or held by the Plan.
CASH FLOWS
CONTRIBUTIONS
The Bank expects to contribute $760,000 to its Pension Trust in 2004.
ESTIMATED FUTURE BENEFIT PAYMENTS
The following benefit payments, which reflect expected future service, as
appropriate, that are expected to be paid in each year 2004, 2005, 2006, 2007,
2008 and years 2009-2013, respectively are $273,600, $273,300, $280,200,
$320,300, $540,200, and $3,309,900.
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 2003, 2002, and 2001, employer contributions amounted to
$115,000, $103,000 and $92,000, respectively.
54
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 263,359 shares remain available under the plan
and 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: Change in options outstanding during the past three years were as
follows:
EXCERCISE PRICE RANGE
STOCK OPTION PLAN SHARES PER SHARE
- --------------------------------------------------------------------------------
Outstanding, December 31, 2000,
(279,028 shares exercisable) 343,146 $4.98
Granted during 2001 68,916 $8.93
Exercised during 2001 (71,612) $5.35
Expired or canceled during 2001 (1,494) $7.03
- --------------------------------------------------------------------------------
Outstanding, December 31, 2001,
(228,016 shares exercisable) 338,956 $4.98
Granted during 2002 28,000
Exercised during 2002 (91,072) $4.98
Expired or canceled during 2002 (1,616) $7.03
- --------------------------------------------------------------------------------
Outstanding, December 31, 2002
(179,702 shares exercisable) 274,268 $4.98 to $10.38
Granted during 2003 34,458 $17.50
Exercised during 2003 (69,701) $4.98 to $10.38
Expired or canceled during 2003 (1,849) $7.029
================================================================================
Outstanding, December 31, 2003
(160,464 shares exercisable) 237,176 $4.98 to $17.50
===============================================================================
FAIR VALUE OF STOCK OPTIONS GRANTS
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for the grants of options in 2003, 2002 and 2001
The following weighted average assumptions were used to determine the fair
value of the options
GRANTED IN 2003:
o Dividend yield of 2.73%
o Expected volatility of 35.8%
o Risk-free interest rate of 3.51% based upon equivalent-term Treasury Rates
o Expected options lives of 6 years, which were contractual lives at the
date of grant
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
55
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 8: PENSION AND BENEFITS continued
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, 2003, 2002 and 2001.
2003 2002 2001
- ----------------------------------------------------------------------------------------------
OPTIONS WEIGHTED OPTIONS WEIGHTED OPTIONS WEIGHTED
GRANTED AVERAGE GRANTED AVERAGE GRANTED AVERAGE
FAIR VALUE FAIR VALUE FAIR VALUE
- ----------------------------------------------------------------------------------------------
Incentive stock options 0 $0.00 0 $0.00 0 $0.00
Non-qualifying stock options 0 $0.00 28,000 $2.88 0 $0.00
Director's plan 34,458 $5.86 0 $0.00 68,918 $2.09
- ----------------------------------------------------------------------------------------------
Total 34,458 $5.86 28,000 $2.88 68,918 $2.09
==============================================================================================
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 2003, there were no awards of restricted stock made. During
2002, 11,000 shares were awarded and issued from Treasury shares. During 2001,
5,000 shares were awarded and issued from Treasury shares. The amount of
compensation costs related to restricted stock awards included in salary expense
was approximately $14,000, in 2003 $257,000 in 2002, and $107,500 in 2001. As of
December 31, 2003, 40,521 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, 2003, 2002 and 2001, respectively, are as follows:
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
CURRENT:
Federal $1,312 $3,487 $3,129
State 262 280 124
- --------------------------------------------------------------------------------
1,574 3,767 3,253
================================================================================
DEFERRED:
Federal 248 (7) (249)
State (659) (39) (37)
- --------------------------------------------------------------------------------
(411) (46) (286)
- --------------------------------------------------------------------------------
Income tax expense $1,163 $3,721 $2,967
================================================================================
The amount of income tax included in comprehensive income was $424,000,
$1,125,000, and $733,000, for the years ended December 31, 2003, 2002 and 2001,
respectively.
56
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) 2003 2002 2001
- --------------------------------------------------------------------------------
Income before income tax expense $7,582 $11,724 $8,978
Federal statutory rate 34% 34% 34%
Compute "expected" Federal income tax expense 2,578 3,986 3,053
State tax net of Federal tax benefit (262) 180 57
Decrease in valuation allowance 0 0 0
Bank owned life insurance (271) (259) (130)
Tax-exempt interest and dividends (971) (222) (177)
Goodwill 0 0 110
Other, net 89 36 54
- --------------------------------------------------------------------------------
Income tax expense $1,163 $3,721 $2,967
================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at December 31,
2003 and 2002 are presented below:
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses $885 $703
Pension expense 817 783
Organization cost 17 37
Other 88 0
NJ NOL and AMA credits 387 0
- --------------------------------------------------------------------------------
Total gross deferred tax asset $2,194 $1,523
================================================================================
DEFERRED TAX LIABILITIES:
Depreciation $401 $264
Market discount accretion 0 47
Deferred fee expense-mortgages 416 241
Unrealized gains on securities
available-for-sale 424 1,125
Other 0 5
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 1,241 1,682
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $953 $(159)
================================================================================
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,
2003 and 2002, 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, 2003, 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 under-capitalized 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%.
57
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 10: REGULATORY CAPITAL REQUIREMENTS continued
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, 2003, 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, 2003 and 2002, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
institution:
FDIC REQUIREMENTS
- --------------------------------------------------------------------------------
UNION CENTER FOR CLASSIFICATION
NATIONAL MINIMUM CAPITAL AS WELL
BANK ACTUALS ADEQUACY CAPITALIZED
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------
December 31, 2003
Leverage (Tier 1) capital $59,630 6.70% $35,615 4.00% $44,519 5.0%
- --------------------------------------------------------------------------------
RISK-BASED CAPITAL:
Tier 1 59,630 11.99% 19,899 4.00% 29,848 6.0%
Total 62,632 12.59% 39,798 8.00% 49,747 10.0%
- --------------------------------------------------------------------------------
December 31, 2002
Leverage (Tier 1) capital $52,749 6.78% $31,136 4.00% $38,920 5.0%
- --------------------------------------------------------------------------------
RISK-BASED CAPITAL:
Tier 1 52,749 11.34% 18,608 4.00% 27,912 6.0%
Total 55,247 11.88% 37,216 8.00% 46,251 10.0%
================================================================================
CAPITAL RATIOS FOR CENTER BANCORP, INC
AS OF MINIMUM AS OF STATUTORY
DECEMBER 31, REQUIRED WELL DECEMBER 31, MINIMUM
(DOLLARS IN THOUSANDS) 2003 2002 AMOUNT CAPITALIZED 2003 CAPITAL
- --------------------------------------------------------------------------------------------
Tier 1 Leverage 7.44% 7.29% 4.00% 5.00% $66,266 $31,146
Tier 1 Risk-Based Capital 13.22% 12.20% 4.00% 6.00% $66,266 $18,618
Total Risk-Based Capital 13.81% 12.73% 8.00% 10.00% $59,271 $40,113
============================================================================================
NOTE 11: CORPORATION - SUBORDINATED DEBENTURES OF THE CORPORATION
- -----------------------------------------------------------------
During 2001 and 2003, the Corporation formed statutory business trusts,
which exist for the exclusive purpose of (i) issuing Trust Securities
representing undivided beneficial interests in the assets of the Trust; (ii)
investing the gross proceeds of the Trust securities in junior subordinated
deferrable interest debentures (subordinated debentures) of the Corporation; and
(iii) engaging in only those activities necessary or incidental thereto. These
subordinated debentures and the related income effects are not eliminated in the
consolidated financial statements as the statutory business trusts are not
consolidated in accordance with FASB interpretation No.46 "Consolidation of
Variable interest Entities." Distributions on the subordinated debentures owned
by the subsidiary trusts below have been classified as interest expense in the
Consolidated Statement of Income.
The Corporation issued $10.0 million in 2001 and $5.0 million in 2003 of
subordinated debentures. These securities are included as a component of Tier 1
Capital for regulatory purposes. The Tier 1 leverage capital ratio was 7.44
percent at December 31, 2003
58
The following table summarizes the subordinated debentures of the
Corporation's subsidiary trusts at December 31, 2003.
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
Redeemable By
Issuance Date Securities Issued Liquidation Value Coupon Rate Maturity Issuer Beginning
- --------------------------------------------------------------------------------------------------
12/19/03 $5,000,000 $1,000 per Capital Floating 1/23/2034 1/23/2009
Security 3-month
LIBOR +285
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, 2003 and 2002. 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 deemed immaterial. Short-term borrowings that mature within six
months have fair values equal to their carrying value.
The fair value of FHLB advances is based on the discounted value of
estimated cash flows. The discount rate is estimated using the rates currently
offered for similar advances. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature, involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities
59
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS continued
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,
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 16,509 $ 16,509 $ 23,220 $ 23,220
Investments Available-for-Sale 364,085 364,085 322,717 322,717
Investments Held to Maturity 155,149 159,989 214,902 219,921
Net loans 346,523 351,876 226,553 232,442
FINANCIAL LIABILITIES:
- --------------------------------------------------------------------------------
Non-interest bearing deposits 120,526 120,526 116,984 116,984
Interest-bearing deposits 512,395 499,126 499,367 502,171
Federal funds purchased,
securities sold under
agreement to repurchase and FHLB
advances 214,724 223,415 140,431 149,525
Subordinated debentures $ 15,000 $ 14,962 $ 10,000 $ 10,000
================================================================================
NOTE 13: PARENT CORPORATION ONLY FINANCIAL STATEMENTS
- -----------------------------------------------------
Center Bancorp, Inc. operates its wholly owned subsidiary, Union Center
National Bank. The earnings of those subsidiary are recognized by the
Corporation using the equity method of accounting. Accordingly, earnings are
recorded as increases in the Corporation's investment in the subsidiaries and
dividends paid reduce the investment in the subsidiaries. The ability of the
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).
60
Condensed financial statements of the Parent Corporation only are as
follows:
CONDENSED STATEMENTS OF CONDITION
At DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 6,207 $ 3,881 $ 4,193
Investment in subsidiary 62,546 57,025 50,163
Other investments 308 310 310
Other assets 766 970 900
- --------------------------------------------------------------------------------
Total assets $ 69,827 $ 62,186 $ 55,566
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 647 $ 822 $ 960
Subordinated debentures 15,000 10,310 10,310
Stockholders' equity 54,180 51,054 44,296
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 69,827 $ 62,186 $ 55,566
================================================================================
CONDENSED STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
INCOME
Dividend income from subsidiary $ 3,050 $ 2,827 $ 1,937
Management fees 61 96 32
- --------------------------------------------------------------------------------
Total Income 3,111 2,923 1,969
Expenses (573) (718) (285)
- --------------------------------------------------------------------------------
Net income before equity in earnings
of subsidiary 2,538 2,205 1,684
Undistributed equity in earnings of
subsidiary 3,881 5,798 4,327
- --------------------------------------------------------------------------------
Net Income $ 6,419 $ 8,003 $ 6,011
================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 6,419 $ 8,003 $ 6,011
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed equity in earnings of
subsidiary (3,881) (5,798) (4,327)
Other, net (281) (93) (26)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 2,257 2,112 1,658
================================================================================
INVESTING ACTIVITIES:
Investments in subsidiaries (3,000) 0 (6,000)
- --------------------------------------------------------------------------------
Net cash used in investing activities (3,000) 0 (6,000)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends (3,014) (2,747) (2,338)
Proceeds from exercise of stock options 662 524 490
Proceeds from issuance of common stock 421 337 255
Proceeds from issuance of subordinated
debentures 5,000 0 10,000
Purchase of Treasury Stock 0 (538) 0
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 3,069 (2,424) 8,407
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 2,326 (312) 4,065
Cash and cash equivalents at
beginning of year 3,881 4,193 128
- --------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 6,207 $ 3,881 $ 4,193
================================================================================
61
CENTER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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, 2003,
approximately $15.9 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 $76,582,669, ($71,005,495 subject to variable rate
indices and $5,577,174 fixed rate commitments) as of December 31, 2003. Standby
letters of credit, which are not reflected in the accompanying consolidated
financial statements, totaled $14,155,131 and $14,716,000 as of December 31,
2003 and 2002, 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.
Corporation controls the credit risk, of these financial instruments through
credit approvals, limits and monitoring procedures. To minimize potential credit
risk the Corporation generally requires collateral and other credit-related
terms and conditions from the customer. In the opinion of management, the
financial condition of the Corporation will not be materially affected by the
final outcome of these commitments and contingent liabilities.
A substantial portion of the Bank's loans is represented by 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 $393,740 in
2003, $390,519 in 2002 and $371,493 in 2001. At December 31, 2003, 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 2004 through 2008
are $396,065, $409,304, $423,208, 459,982 and $459,982 respectively. Minimum
rentals due 2009 and after are $881,807.
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.
62
NOTE 16: QUARTERLY FINANCIAL INFORMATION
CENTER BANCORP, INC., (UNAUDITED)
- ---------------------------------
2003
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- --------------------------------------------------------------------------------
Total interest income $9,253 $8,152 $9,076 $9,438
Total interest expense 3,173 3,111 3,207 3,235
Net interest income 6,080 5,041 5,869 6,203
Provision for loan losses 260 103 79 80
Other income 741 825 742 939
Other expense 4,575 4,415 4,613 4,733
Income before income taxes 1,986 1,348 1,919 2,329
Net income 1,711 1,515 1,507 1,686
Earnings per share:
Basic $0.20 $0.18 $0.18 $0.20
Diluted $0.20 $0.18 $0.18 $0.20
Weighted average common shares
outstanding:
Basic 8,514,542 8,480,651 8,465,762 8,440,622
Diluted 8,601,830 8,570,874 8,544,098 8,529,786
================================================================================
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 $ 0.21 $0.25 $0.25 $0.25
Diluted $ 0.21 $0.25 $0.25 $0.24
Weighted average common shares
outstanding:
Basic 8,406,182 8,425,730 8,395,686 8,346,330
Diluted 8,477,248 8,488,768 8,462,380 8,415,460
================================================================================
63
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 subsidiary as of December 31, 2003 and 2002, 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,
2003. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Center
Bancorp, Inc. and subsidiary as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003 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.
/s/ KPMG LLP
------------------------
Short Hills, New
Jersey February 27, 2004
64
65
CENTER BANCORP, INC.
STOCKHOLDERS' INFORMATION
CORPORATE HEADQUARTERS FINANCIAL INFORMATION
AND FORM 10K
Center Bancorp, Inc.
2455 Morris Avenue Persons may obtain a copy,
Union, NJ 07083 free of charge, of the Center
1-800-862-3683 Bancorp, Inc. 2003 Annual
www.centerbancorp.com Report and Form 10K (excluding
www.ucnb.com exhibits) as filed with the
Securities and Exchange
ANNUAL SHAREHOLDERS' MEETING Commission. Investors,
Security Analysts and others
The annual shareholders' desiring financial information
meeting of Center Bancorp, or a copy of such report
Inc. will be held at 10:00 should contact:
A.M. on Tuesday, April 20, Anthony C. Weagley
2004 at Suburban Golf Club, Vice President and Treasurer
1730 Morris Avenue, Union, 1-800-862-3683
New Jersey.
SHAREHOLDER INQUIRIES
DIVIDEND REINVESTMENT AND
STOCK PURCHASE PLAN For information regarding your
shares of common stock of
Center Bancorp, Inc. offers Center Bancorp, Inc., please
its shareholders a convenient contact:
plan to increase their Anthony C. Weagley
investment in the Company. Vice President and Treasurer
Through the Dividend 1-800-862-3683
Reinvestment and Stock
Purchase Plan, holders of STOCK LISTING
stock may have their quarterly
dividends automatically NASDAQ Stock Market - CNBC
reinvested in additional Center Bancorp, Inc. Common
common shares without Stock is traded on the NASDAQ
brokerage fees, commissions or Stock Market under the Symbol
service charges. Shareholders CNBC. Daily stock quotes
not enrolled in this plan, as appear in some newspapers
well as brokers and custodians under: CtrBcp, CenterBc, and
who hold stock in Center CenterBcp.
Bancorp, Inc. may enroll in
the plan by contacting Anthony REGISTRAR AND TRANSFER AGENT
C. Weagley, Vice President and
Treasurer, 1-800-862-3683. Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
66
LOCATIONS
UNION
MAIN OFFICE BERKELEY HEIGHTS
2455 Morris Avenue BERKELEY HEIGHTS
Union, NJ 07083 BANKING CENTER
(908) 688-9500 Lobby, 512 Springfield Avenue
Drive-Up and ATM Berkeley Heights, NJ 07922
Lobby, Drive-Up and ATM
CENTER OFFICE
2003 Morris MADISON
Avenue Union, NJ 07083 MADISON BANKING CENTER
Lobby and ATM 300 Main Street
Madison, NJ 07940
STOWE STREET Lobby, Drive-Up and ATM
2022 Stowe Street
Union, NJ 07083 MORRISTOWN
Drive-Up, Walk-Up and ATM MORRISTOWN BANKING CENTER
84 South Street
FIVE POINTS Morristown, NJ 07960
356 Chestnut Street Lobby and ATM
Union, NJ 07083
Lobby, Drive-Up and ATM TOWN HALL BANKING CENTER
214 South Street
CAREER CENTER Morristown, NJ 07960
Union High School Lobby, Drive-Up and ATM
North Third Street
Union, NJ 07083 SPRINGFIELD
Lobby SPRINGFIELD BANKING CENTER
783 Mountain Avenue
AUTO BANKING CENTER Springfield, NJ 07081
Bonnel Court Lobby, Drive-Up and ATM
Union, NJ 07083
Drive-Up, Walk-Up and ATM SUMMIT
SUMMIT BANKING CENTER
UNION HOSPITAL 392 Springfield
1000 Galloping Hill Avenue Summit, NJ 07901
Road Union, NJ 07083 Lobby and ATM
ATM
VAUXHALL/MILLBURN
UNION TRAIN STATION MILLBURN MALL
900 Green Lane BANKING CENTER
Union, NJ 07083 2933 Vauxhall Road
ATM Vauxhall, NJ 07088
Lobby and ATM