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SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2002 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO___________
Commission file number 2-81353
CENTER BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 52-1273725
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2455 Morris Avenue, Union, New Jersey 07083
- --------------------------------------------------------------------------------
(Address of principal executives offices) (Zip Code)
(908) 688-9500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes|X| No|_|
Shares outstanding on October 31, 2002
- --------------------------------------
Common stock - no par value -4,200,186 shares
1
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition at September 30,
2002(Unaudited) and December 31, 2001 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2002 and 2001(Unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2002 and 2001(Unaudited) 5
Notes to the Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Qualitative and Quantitative Disclosures about Market Risks 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits 24
Signature 24
Certifications 25-28
Exhibit Index 29
Exhibits 30-31
2
Center Bancorp, Inc.
Consolidated Statements of Condition
September 30, December 31,
(Dollars in thousands) 2002 2001
--------------- ---------------
(unaudited)
Assets:
Cash and due from banks $ 19,351 $ 29,668
Investment securities held to maturity (approximate
market value of $227,328 in 2002 and $205,604 in 2001) 220,730 205,237
Investment securities available-for-sale 263,440 212,037
--------------- ---------------
Total investment securities 484,170 417,274
--------------- ---------------
Loans, net of unearned income 226,656 211,236
Less - Allowance for loan losses 2,381 2,191
--------------- ---------------
Net loans 224,275 209,045
--------------- ---------------
Premises and equipment, net 12,582 11,685
Accrued interest receivable 5,078 4,542
Bank owned separate account life insurance 13,946 13,382
Other assets 1,974 1,916
Goodwill 2,091 2,091
--------------- ---------------
Total assets $ 763,467 $ 689,603
=============== ===============
Liabilities
Deposits:
Non-interest bearing $ 110,437 $ 103,520
Interest bearing:
Certificates of deposit $100,000 and over 30,862 23,371
Savings and time deposits 409,246 370,942
--------------- ---------------
Total deposits 550,545 497,833
--------------- ---------------
Federal funds purchased and securities sold under
agreements to repurchase 81,494 72,296
Federal Home Loan Bank advances 65,000 60,000
Corporation - obligated mandatorily redeemable trust preferred
securities of subisidary trust holding solely junior
subordinated debentures of the Corporation 10,000 10,000
Accounts payable and accrued liabilities 6,392 5,178
--------------- ---------------
Total liabilities 713,431 645,307
--------------- ---------------
Stockholders' equity
Preferred stock, no par value, authorized 5,000,000 shares; none issued 0 0
Common stock, no par value:
Authorized 20,000,000 shares; issued 4,745,267 and 4,718,229
shares in 2002 and 2001, respectively 18,893 14,677
Additional paid in capital 4,392 4,180
Retained earnings 28,792 28,569
Treasury stock at cost (540,202 and 573,181 shares in 2002 and
2001, respectively) (4,129) (4,115)
Restricted stock (28) (135)
Accumulated other comprehensive income 2,116 1,120
--------------- ---------------
Total stockholders' equity 50,036 44,296
--------------- ---------------
Total liabilities and stockholders' equity $ 763,467 $ 689,603
=============== ===============
All common share and per share amounts have been restated to reflect the 5%
common stock dividend distributed on June 1, 2002 to common stockholders of
record May 17, 2002.
See Accompanying Notes to Consolidated Financial Statements.
3
Center Bancorp, Inc.
Consolidated Statements of Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands, except per share data) 2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 3,816 $ 3,912 $ 11,245 $ 11,512
Interest and dividends on investment securities:
Taxable interest income 6,226 5,380 19,149 16,481
Nontaxable interest income 150 120 451 353
Interest on Federal funds sold and securities
purchased under agreement to resell 50 26 59 331
------------ ------------ ------------ ------------
Total interest income 10,242 9,438 30,904 28,677
------------ ------------ ------------ ------------
Interest expense:
Interest on certificates of deposit $100,000 or more 94 239 383 1,271
Interest on other deposits 2,350 2,228 6,706 7,258
Interest on borrowings 1,340 1,363 3,983 3,903
------------ ------------ ------------ ------------
Total interest expense 3,784 3,830 11,072 12,432
------------ ------------ ------------ ------------
Net interest income 6,458 5,608 19,832 16,245
------------ ------------ ------------ ------------
Provision for loan losses 90 256 270 514
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 6,368 5,352 19,562 15,731
------------ ------------ ------------ ------------
Other income:
Service charges, commissions and fees 409 391 1,183 1,178
Bank Owned Life Insurance 193 143 564 226
Other income 114 67 279 258
Gain on securities sold 203 28 445 180
------------ ------------ ------------ ------------
Total other income 919 629 2,471 1,842
------------ ------------ ------------ ------------
Other expense:
Salaries and employee benefits 2,373 1,959 6,955 5,665
Occupancy expense, net 395 364 1,233 1,168
Premises and equipment expense 388 390 1,172 1,058
Stationery and printing expense 115 107 419 334
Marketing and advertising 122 92 478 350
Other expenses 792 849 2,600 2,549
------------ ------------ ------------ ------------
Total other expense 4,185 3,761 12,857 11,124
------------ ------------ ------------ ------------
Income before income tax expense 3,102 2,220 9,176 6,449
Income tax expense 998 725 2,950 2,199
------------ ------------ ------------ ------------
Net income $ 2,104 $ 1,495 $ 6,226 $ 4,250
============ ============ ============ ============
Earnings per share
Basic $ 0.50 $ 0.36 $ 1.48 $ 1.03
Diluted $ 0.50 $ 0.36 $ 1.47 $ 1.02
============ ============ ============ ============
Average weighted common shares outstanding
Basic 4,212,865 4,141,860 4,194,624 4,130,797
Diluted 4,244,384 4,179,733 4,227,768 4,165,917
============ ============ ============ ============
All common share and per share amounts have been restated to reflect the 5%
common stock dividend distributed on June 1, 2002 to common stockholders of
record May 17, 2002.
See Accompanying Notes to Consolidated Financial Statements.
4
Center Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30
-----------------------------------
(Dollars in thousands) 2002 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,226 $ 4,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,256 1,387
Provision for loan losses 270 514
Gain on sale of investment securities available-for-sale (445) (180)
Proceeds from sale of other real estate owned 0 45
(Increase) Decrease in accrued interest receivable (536) 718
Loss on sale of other real estate owned 0 4
Increase in other assets (58) (164)
Increase in cash surrender value of Bank Owned Life Insurance (564) (226)
Increase in other liabilities 1,214 2,775
Amortization of premium and (accretion) of
discount on investment securities, net 966 (52)
--------------- ---------------
Net cash provided by operating activities 8,329 9,071
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 147,379 66,071
Proceeds from redemption of FHLB stock 2,860 460
Proceeds from maturities of securities held-to-maturity 72,018 71,848
Proceeds from sales of securities available-for-sale 38,667 27,659
Purchase of securities available-for-sale (228,957) (125,784)
Purchase of securities held-to-maturity (95,427) (56,552)
Purchase of FHLB/FRB Stock (2,960) 0
Net increase in loans (15,500) (12,980)
Property and equipment expenditures, net (2,153) (1,995)
Purchase of bank owned life insurance 0 (10,000)
--------------- ---------------
Net cash used in investing activities (84,073) (41,273)
=============== ===============
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 52,712 4,023
Dividends paid (2,033) (1,744)
Proceeds from issuance of common stock 876 493
Repurchase of Treasury stock (326) 0
Net increase in borrowing 14,198 24,669
--------------- ---------------
Net cash provided by financing activities 65,427 27,441
--------------- ---------------
Net decrease in cash and cash equivalents (10,317) (4,761)
--------------- ---------------
Cash and cash equivalents at beginning of period $ 29,668 $ 22,274
--------------- ---------------
Cash and cash equivalents at end of period $ 19,351 $ 17,513
=============== ===============
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings $ 10,997 $ 12,404
Income taxes $ 3,410 $ 2,199
See Accompanying Notes to Consolidated Financial Statements.
5
Notes to Consolidated Financial Statements
Note I
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Center Bancorp, Inc. (the"
Corporation") are prepared on the accrual basis and include the accounts of the
Corporation and its wholly owned subsidiaries, Union Center National Bank (the
"Bank") and Center Bancorp Statutory Trust I. All significant inter-company
accounts and transactions have been eliminated from the accompanying
consolidated financial statements.
Business
The Bank provides a full range of banking services to individual and corporate
customers through branch locations in Union and Morris Counties, New Jersey. The
Bank is subject to competition from other financial institutions, is subject to
the regulations of certain federal agencies and undergoes periodic examinations
by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as of the date of the statement of condition, and revenues and
expenses for the applicable period. Actual results could differ significantly
from those estimates.
In the opinion of management, all adjustments necessary for a fair presentation
of the Corporation's financial condition and results of operations for the
interim periods have been made. Such adjustments are of a normal recurring
nature. Certain reclassifications have been made for 2001 to conform to the
classifications presented in 2002. Results for the period ended September 30,
2002 are not necessarily indicative of results for any other interim period or
for the entire fiscal year. Reference is made to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2001 for information regarding
accounting principles.
Note 2
Recent Accounting Pronouncements
SFAS No. 141
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after September 30, 2001 as well as all purchase method business
combinations completed after September 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Corporation
had no business combinations subsequent to September 30, 2001, and therefore the
implementation of this Statement 141 did not have an impact on the Corporation.
6
SFAS NO. 142
Upon adoption of Statement 142, the Corporation is required to evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination. In addition, the Corporation is required to reassess the
useful lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the end of the first interim period after adoption. To the extent an intangible
asset is identified as having an indefinite useful life, the Corporation is
required to test the tangible asset for impairment in accordance with the
provisions of Statement 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 requires the Corporation to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. The Corporation
will then have up to nine months from the date of adoption to determine the fair
value of goodwill and compare it to the carrying amount. To the extent that the
goodwill carrying amount exceeds its fair value, an indication exits that the
goodwill may be impaired and the Corporation must perform the second step of the
transitional impairment test. In the second step, the Corporation must compare
the implied fair value of the goodwill, determined by allocating the fair value
to all of its assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of the date of adoption.
This second step is required to be completed as soon as possible, but no later
than the end of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle in the
Corporation's statement of earnings.
As of December 31, 2001, the Corporation had $2.1 million in unamortized
goodwill with annual amortization of $323,000, which ceased upon the adoption of
SFAS No. 142, "Goodwill and Intangible Assets". The Corporation adopted SFAS No.
142 on January 1, 2002. Accordingly, the September 30, 2002 Financial Statements
do not include amortization of goodwill. For the three and nine months ended
September 30, 2001, amortization of goodwill totaled $81,000 and $243,000,
respectively. If SFAS No. 142 had been adopted on January 1, 2001, net income
for the three and nine months ended September 30, 2001 would have increased
$81,000 and $243,000, respectively. Accordingly, basic and diluted earnings per
share would have increased $.02 and $.06 for the three and nine months ended
September 30, 2001, respectively.
SFAS NO. 144
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", it retains many of the fundamental
provisions of that Statement. The Statement is effective for fiscal years
beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not
have a significant impact on the Corporation's consolidated financial
statements.
SFAS No. 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64 Amendment of FASB Statement No. 13, and Technical Corrections. The
Statement was issued to eliminate an inconsistency in the required accounting
for sale-leaseback transactions and certain lease modifications that were
similar to sale-leaseback transactions and to rescind FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers as well as amending other
existing authoritative pronouncements to make various technical corrections.
SFAS No. 145 also rescinds SFAS No. 4 Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64 Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements. Under SFAS No. 4, as amended by SFAS No. 64, gains
and losses from the extinguishment of debt were required to be classified as an
extraordinary item, if material. Under SFAS No. 145, gains or losses from the
extinguishment of debt are to be classified as a component of operating income,
rather than an extraordinary item. SFAS No. 145 is effective for fiscal years
beginning after May 16, 2002, with early adoption of the provisions related to
the rescission of SFAS No. 4 encouraged. Upon adoption, companies must
reclassify prior period amounts previously classified as an extraordinary item.
Management does not anticipate that the initial adoption of SFAS 145 will have a
significant impact on the Corporation's consolidated financial statements.
7
SFAS No. 146
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The standard requires companies to recognize cost
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
SFAS No. 147
In October, 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions- an amendment to FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. The provisions of Statement No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the definition
of a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of Statement No. 147
are effective October 1, 2002. This Statement will not have any impact on the
Corporation's consolidated financial statements.
Note 3
A summary of comprehensive income follows.
Comprehensive Income Three Months Nine Months
(In thousands) Ended September 30, Ended September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Income $ 2,104 $ 1,495 $ 6,226 $ 4,250
Other comprehensive income
Unrealized holding gains arising
during the period, net of taxes 104 1,040 1,290 2,128
Less reclassification adjustment for (gains)
losses included in net income (net of tax benefit) (134) (18) (294) (119)
------------ ------------ ------------ ------------
Total other comprehensive income (30) 1,022 996 2,009
------------ ------------ ------------ ------------
Total comprehensive income $ 2,074 $ 2,517 $ 7,222 $ 6,259
============ ============ ============ ============
Note 4
The following is a reconciliation of the calculation of basic and diluted
earnings per share.
Three Months Nine Months
(In thousands, except per share data) Ended September 30, Ended September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Income $ 2,104 $ 1,495 $ 6,226 $ 4,250
Weighted Average Shares 4,213 4,142 4,195 4,131
Effect of Dilutive Stock Options 31 38 33 35
------------ ------------ ------------ ------------
Total Weighted Average Dilutive Shares 4,244 4,180 4,228 4,166
------------ ------------ ------------ ------------
Basic Earnings per Share $ 0.50 $ 0.36 $ 1.48 $ 1.03
------------ ------------ ------------ ------------
Diluted Earnings per Share $ 0.50 $ 0.36 $ 1.47 $ 1.02
============ ============ ============ ============
All common share and per share amounts have been restated to reflect the 5%
common stock dividend distributed on June 1, 2002 to common stockholders of
record May 17, 2002.
8
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Net income for the nine months ended September 30, 2002 amounted to $6,226,000
compared to $4,250,000 earned for the comparable nine-month period ended
September 30, 2001. On a per diluted share basis, earnings increased to $1.47
per share as compared with $1.02 per share for the nine-months ended September
30, 2001. All common stock per share amounts have been restated to reflect the
5% common stock dividend declared April 16, 2002, and distributed June 1, 2002.
The annualized return on average assets increased to 1.13 percent compared with
..96 percent for the comparable nine-month period in 2001. The annualized return
on average stockholders' equity was 17.37 percent for the nine month period
ended September 30, 2002 as compared to 13.50 percent for the nine-months ended
September 30, 2001. Earnings performance for the first nine months of 2002
primarily reflects a higher level of net interest income and increased
non-interest income, offsetting increased non-interest expense and income tax
expense.
Net income for the three months ended September 30, 2002 amounted to $2,104,000
as compared to $1,495,000 earned for the comparable three-month period ended
September 30, 2001. On a per diluted share basis, earnings increased to $0.50
per share as compared with $.36 per share for the three months ended September
30, 2001. The annualized return on average assets increased to 1.12 percent
compared with .99 percent for the comparable three-month period in 2001. The
annualized return on average stockholders' equity was 16.89 percent for the
three-month period ended September 30, 2002 as compared to 13.73 percent for the
three-months ended September 30, 2001. Earnings performance for the third
quarter of 2002 primarily reflects a higher level of net interest income and
increased non-interest income, offsetting increased non-interest expense and
income tax expense.
Net interest income is the difference between the interest earned on the
portfolio of earning-assets (principally loans and investments) and the interest
paid for deposits and short-term borrowings, which support these assets. Net
interest income is presented below first on a fully 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.
Net Interest Income
(dollars in thousands) Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2002 2001 Change 2002 2001 Change
------------ ------------ ------------ ------------ ------------ ------------
Interest income: (Tax-equivalent basis):
Investments $ 6,453 $ 5,562 16.0 $ 19,832 $ 17,016 16.5
Loans, including fees 3,816 3,912 (2.5) 11,245 11,512 (2.3)
Federal funds sold and securities sold
under agreements to repurchase 50 26 92.3 59 331 (82.2)
------------ ------------ ------------ ------------ ------------ ------------
Total interest income 10,319 9,500 8.6 31,136 28,859 7.9
------------ ------------ ------------ ------------ ------------ ------------
Interest expense:
Certificates $100,000 or more 94 239 (60.7) 383 1,271 69.9
Savings and Time Deposits 2,350 2,228 5.5 6,706 7,258 7.6
FHLB advances 849 841 1.0 2,503 2,495 0.3
Short-term borrowings 491 522 (5.9) 1,480 1,408 5.1
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense 3,784 3,830 (1.2) 11,072 12,432 (10.9)
------------ ------------ ------------ ------------ ------------ ------------
Net interest income *tax-equivalent basis 6,535 5,670 15.3 20,064 16,427 22.1
============ ============ ============ ============ ============ ============
Tax-equivalent adjustment (77) (62) 24.2 (232) (182) 27.5
Net interest income $ 6,458 $ 5,608 15.2 $ 19,832 $ 16,245 22.1
============ ============ ============ ============ ============ ============
*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 accrued on securities of state and political
subdivisions.
9
Net interest income on a fully tax-equivalent basis increased $3,637,000 or 22.1
percent to approximately $20.064 million for the nine months ended September 30,
2002, from $16.427 million for the comparable period in 2001. For the nine
months ended September 30, 2002, the net interest margin decreased 6 basis
points to 3.92 percent from 3.98 percent due primarily to an increase in the
volume of interest earning assets and the lower yield on interest-earning assets
offset by the lower cost of funds on interest-bearing liabilities.
Net interest income on a fully tax-equivalent basis increased $865,000 or 15.3
percent to $6.535 million for the three months ended September 30, 2002, from
$5.670 million for the comparable period in 2001. For the three months ended
September 30, 2002, the net interest margin decreased 34 basis points to 3.74
percent from 4.08 percent due primarily to an increase in the volume of
interest-earning assets and the lower yield on interest-earning assets offset by
the lower cost of funds on interest-bearing liabilities.
Interest income on a fully-tax-equivalent basis for the nine-month period ended
September 30, 2002 increased by $2.277 million or 7.9 percent, versus the
comparable period ended September 30, 2001. The primary increase resulted from
the growth of earning assets, primarily investment securities. This was
partially offset by a decrease in interest income attributable to loans of
$267,000, reflecting reduced yields on loans. The growth in earning assets was
funded primarily through increased levels of money market, savings deposits,
borrowings and the issuance of mandatorily redeemable trust preferred
securities.
For the three-month period ended September 30, 2002 interest income on a
tax-equivalent basis increased by $819,000 or 8.6 percent over the comparable
three-month period in 2001. The primary increase resulted from the growth of
earning assets, primarily investment securities. This was partially offset by a
decrease in interest income attributable to loans of $96,000, reflecting reduced
yields on loans. The growth in earning assets was funded primarily through
increased levels of money market, savings deposits, borrowings and the issuance
of mandatorily redeemable trust preferred securities.
The factors underlying the year-to year changes in net interest income are
reflected in the tables appearing on pages 9, 11,12 and 13, each of which has
been presented on a tax-equivalent basis (assuming a 34.0 percent tax rates).
The table on page 12 (Average Balance Sheet with Interest and Average Rates)
shows the Corporation's consolidated average balance of assets, liabilities, and
stockholders' equity, the amount of income produced from interest-earning assets
and the amount of expense resulting from interest-bearing liabilities and net
interest income as a percentage of average interest-earning assets. The table
presented on page 11 (Analysis of Variance in Net Interest Income Due to Volume
and Rates) quantifies the impact on net interest income resulting from changes
in average balances and average rates over the past three months and nine
months; 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.
Average Federal funds sold and securities purchased under agreements to resell
decreased for the nine month period in 2002, but increased for the three month
period in 2002 compared to 2001. For the nine months ended September 30, 2002
the decrease amounted to approximately $4.4 million. For the three months ended
September 30, 2002 the increase amounted to approximately $8.5 million. For both
the three and nine-month periods the Corporation elected to invest additional
monies in overnight institutional money market funds, which are part of the
investment portfolio, versus Federal funds or repurchase agreements due to more
favorable rates available for liquid overnight funds.
Interest expense for the nine months ended September 30, 2002 decreased $1.360
million or 10.9 percent from the comparable nine-month period ended September
30, 2001, as a result of a decline in rates despite higher average volumes of
lower cost interest-bearing liabilities and borrowings. A $3.7 million decrease
in interest expense attributable to decreased rates brought about by the actions
of the Federal Reserve in lowering interest rates was offset in part by $2.4
million increases in interest expense attributable to volume related factors.
Interest expense for the three months ended September 30, 2002 decreased $46,000
or 1.2 percent from the comparable three-month period ended September 30, 2001,
as a result of a decline in interest rates despite higher average volumes of
lower cost interest-bearing liabilities and borrowings. A $935,000 decrease in
interest expense attributable to decreased rates brought about by the actions of
the Federal Reserve in lowering interest rates was offset in part by an $889,000
increase in interest expense attributable to volume related factors.
10
For both the three and nine month periods ended September 30, 2002, short-term
interest rates have decreased compared to 2001, as a result of monetary policy
promulgated by the Federal Reserve Open Market Committee. The Fed has lowered
the Federal Funds target rate on August 21, September 17, October 2, November 6
and December 11, 2001. Since September 2001 the Federal Funds rate has fallen
175 basis points.
For the nine months ended September 30, 2002, the Corporation's net interest
spread on a tax-equivalent basis (i.e. interest income on a tax-equivalent basis
as a percent of average interest-earning-assets less interest expense as a
percent of total interest bearing liabilities) increased to 3.50 percent from
3.32 percent for the nine months ended September 30, 2001. The increase
reflected a widening of spreads between yields earned on loans and investments
and rates paid for supporting funds. Net interest margins expanded due in part
to a decline in interest rates, despite the increased volumes of
interest-bearing checking, money market and savings deposits in addition to
short-term borrowings. The Federal Reserve left the target Federal Funds rate at
a 40-year low of 1.75 percent during the nine months ended September 30, 2002,
as compared to the same period in 2001, when the Federal Reserve lowered
interest rates eight times. Although the yield on interest-earning assets
declined to 6.08 percent from 7.00 percent in 2001 (a change of 92 basis
points), this change was offset by lower rates paid for interest-bearing
liabilities coupled with a change in the mix of interest-bearing liabilities.
The total cost of interest-bearing liabilities decreased to 2.58 percent, a
change of 110 basis points, for the nine months ended September 30, 2002 from
3.68 percent for the nine months ended September 30, 2001.
For the three months ended September 30, 2002, the Corporation's net interest
spread on a tax-equivalent basis decreased to 3.31 percent from 3.47 percent for
the three months ended September 30, 2001. The decrease reflected a narrowing of
spreads between yields earned on loans and investments and rates paid for
supporting funds. Net interest margins contracted due in part to the current low
interest environment and decline in market interest rates; other related factors
contributing to the overall cost of supporting liabilities in the third quarter
were increased volumes of interest-bearing checking, money market and savings
deposits in addition to short-term borrowings. The Federal Reserve left the
target Federal Funds rate at a 40-year low of 1.75 percent during the
three-months ended September 30, 2002, as compared to the same period in 2001,
when the Federal Reserve lowered interest rates two times. Although the yield on
interest-earning assets declined to 5.90 percent from 6.83 percent in 2001 (a
change of 93 basis points), this change was substantially offset by lower rates
paid for interest-bearing liabilities coupled with a change in the mix of
interest-bearing liabilities. The total cost of interest-bearing liabilities
decreased to 2.59 percent or 77 basis points, for the three months ended
September 30, 2002 from 3.36 percent for the three months ended September 30,
2001.
The trend is primarily due to the previously referenced change in the mix and
decrease in rates paid on certain interest-bearing liabilities. The decrease in
these funding costs continues to change disproportionately to the rates on new
loans and investments.
The following table "Analysis of Variance in Net Interest Income due to Volume
and Rates" analyzes net interest income by segregating the volume and rate
components of various interest-earning assets and liabilities and the changes in
the rates earned and paid by the Corporation.
Analysis of Variance in Net Interest Income Due to Volume and Rates
(Tax-Equivalent Basis)
(dollars in thousands) Three Months Ended 9/30/02 Nine Months Ended 9/30/02
2002/2001 Increase/(Decrease) 2002/2001 Increase/(Decrease)
Due to Change in: Due to Change in:
------------------------------------------ ------------------------------------------
Average Average Net Average Average Net
Interest-earning assets Volume Rate Change Volume Rate Change
------------ ------------ ------------ ------------ ------------ ------------
Investment Securities
Taxable $ 1,672 $ (826) $ 846 $ 5,313 $ (2,645) $ 2,668
Non-taxable 44 1 45 149 (1) 148
Federal funds sold and securities
purchased under agreement to resell 11 13 24 (117) (155) (272)
Loans, net of unearned discount 324 (420) (96) 910 (1,177) (267)
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets $ 2,051 $ (1,232) $ 819 $ 6,255 $ (3,978) $ 2,277
============ ============ ============ ============ ============ ============
Interest-bearing liabilities:
Money Market deposits $ 76 $ (148) $ (72) $ 348 $ (560) $ (212)
Savings deposits 213 (481) (268) 804 (1,010) (206)
Time deposits 390 (84) 306 319 (1,436) (1,117)
Other interest-bearing deposits 36 (25) 11 182 (87) 95
Borrowings 174 (337) (163) 720 (1,060) (340)
Trust Preferred 0 140 140 0 420 420
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 889 $ (935) $ (46) $ 2,373 $ (3,733) $ (1,360)
============ ============ ============ ============ ============ ============
Change in net interest income $ 1,162 $ (297) $ 865 $ 3,882 $ (245) $ 3,637
============ ============ ============ ============ ============ ============
11
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three months ended September 30, 2002 and 2001 the
Corporation's average assets, liabilities and stockholders' equity. The
Corporation's net interest income, net interest spreads and net interest income
as a percentage of interest-earning assets are also reflected.
Average Balance Sheet with Interest and Average Rates
Three Month
Period Ended September 30,
---------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate
------------ ------------ ------------ ------------ ------------ ------------
Assets
Interest-earning assets:
Investment securities: (1)
Taxable $ 446,434 $ 6,226 5.58% $ 331,884 $ 5,380 6.48%
Non-taxable 13,020 227 6.97% 10,518 182 6.92%
Federal funds sold and securities
purchased under agreement to resell 11,583 50 1.73% 3,103 26 3.35%
Loans, net of unearned income (2) 228,764 3,816 6.67% 210,472 3,912 7.43%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 699,801 10,319 5.90% 555,977 9,500 6.83%
------------ ------------ ------------ ------------ ------------ ------------
Non-interest earning assets
Cash and due from banks 18,107 17,264
Bank Owned Life Insurance 13,831 10,132
Other assets 24,889 19,829
Allowance for possible loan losses (2,368) (1,922)
------------ ------------
Total non-interest earning assets 54,459 45,303
------------ ------------
Total assets $ 754,260 $ 601,280
============ ============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 90,362 $ 440 1.95% $ 77,594 $ 512 2.64%
Savings deposits 157,546 587 1.49% 120,646 855 2.83%
Time deposits 128,624 1,266 3.94% 89,564 960 4.29%
Other interest bearing deposits 59,431 151 1.02% 46,192 140 1.21%
Borrowings 139,459 1,200 3.44% 122,323 1,363 4.46%
Trust Preferred 10,000 140 5.60% 0 0 0.00%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities 585,422 3,784 2.59% 456,319 3,830 3.36%
------------ ------------ ------------ ------------ ------------ ------------
Noninterest-bearing liabilities:
Demand deposits 111,858 95,358
Other noninterest-bearing deposits 684 514
Other liabilities 6,472 5,520
------------ ------------
Total noninterest-bearing liabilities 119,014 101,392
Stockholders' equity 49,824 43,569
------------ ------------
Total liabilities and
stockholders' equity $ 754,260 $ 601,280
============ ============
Net interest income (tax-equivalent basis) $ 6,535 $ 5,670
------------ ------------
Net Interest Spread 3.31% 3.47%
------------ ------------
Net interest income as percent
of earning-assets 3.74% 4.08%
------------ ------------
Tax equivalent adjustment (3) (77) (62)
------------ ------------
Net interest income $ 6,458 $ 5,608
------------ ------------
(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.
12
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the nine months ended September 30, 2002 and 2001 the Corporation's
average assets, liabilities and stockholders' equity. The Corporation's net
interest income, net interest spreads and net interest income as a percentage of
interest-earning assets are also reflected.
Average Balance Sheet with Interest and Average Rates
Nine Month
Period Ended September 30,
---------------------------------------------------------------------------------------
2002 2001
------------------------------------------ ------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(tax equivalent basis, dollars in thousands) Balance Expense Rate Balance Expense Rate
------------ ------------ ------------ ------------ ------------ ------------
Assets
Interest-earning assets:
Investment securities:(1)
Taxable $ 443,427 $ 19,149 5.76% $ 326,139 $ 16,481 6.74%
Non-taxable 13,053 683 6.98% 10,197 535 7.00%
Federal funds sold and securities
purchased under agreement to resell 4,565 59 1.72% 8,995 331 4.91%
Loans, net of unearned income (2) 221,614 11,245 6.77% 204,671 11,512 7.50%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 682,659 31,136 6.08% 550,002 28,859 7.00%
------------ ------------ ------------ ------------ ------------ ------------
Non-interest earning assets
Cash and due from banks 18,293 17,284
Bank Owned Life Insurance 13,641 5,268
Other assets 23,771 20,255
Allowance for possible loan losses (2,296) (1,772)
------------ ------------
Total non-interest earning assets 53,409 41,035
------------ ------------
Total assets $ 736,068 $ 591,037
============ ============
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $ 96,805 1,420 1.96% $ 77,643 1,632 2.80%
Savings deposits 156,854 2,513 2.14% 115,718 2,719 3.13%
Time deposits 110,677 2,592 3.12% 101,267 3,709 4.88%
Other interest bearing deposits 64,480 564 1.17% 44,774 469 1.40%
Borrowings 133,518 3,563 3.56% 110,542 3,903 4.71%
Trust Preferred 10,000 420 5.60% 0 0 0.00%
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities 572,334 11,072 2.58% 449,944 12,432 3.68%
------------ ------------ ------------ ------------ ------------ ------------
Noninterest-bearing liabilities:
Demand deposits 109,331 93,922
Other noninterest-bearing deposits 569 552
Other liabilities 6,035 4,652
------------ ------------
Total noninterest-bearing liabilities 115,935 99,126
Stockholders' equity 47,799 41,967
------------ ------------
Total liabilities and
stockholders' equity $ 736,068 $ 591,037
============ ============
Net interest income (tax-equivalent basis) $ 20,064 $ 16,427
------------ ------------
Net Interest Spread 3.50% 3.32%
------------ ------------
Net interest income as percent
of earning-assets 3.92% 3.98%
------------ ------------
Tax equivalent adjustment (3) (232) (182)
------------ ------------
------------ ------------
Net interest income $ 19,832 $ 16,245
------------ ------------
(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
13
Investments
For the nine months ended September 30, 2002, the average volume of investment
securities increased to approximately $456.5 million, or 66.9 percent of average
earning assets, an increase of $120.1 million on average as compared to the same
period in 2001. The tax-equivalent yield on investments decreased by 96 basis
points to 5.79 percent from a yield of 6.75 percent during the nine month period
ended September 30, 2001. The 96 basis points decline in yield on the portfolio
was attributable to lower rates, which unfavorably affected the yield on the
additional volume added to the portfolio, as well as, purchases made to replace
maturing and called investments. The increased size of the investment portfolio
for both the nine and three months ended September 30, 2002 largely reflects the
Corporation's leverage strategies, which were implemented in the fourth quarter
of 2001.
For the three months ended September 30, 2002, the average volume of investment
securities increased to approximately $459.5 million, or 65.7 percent of average
earning assets, an increase of $117.1 million on average as compared to the same
period in 2001. The tax-equivalent yield on investments decreased by 88 basis
points to 5.62 percent from a yield of 6.50 percent during the three month
period ended September 30, 2002. The increased volume represents both securities
added to the portfolio coupled with purchases made to replace maturing and
called investments made at lower rates. At September 30, 2002, 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 impact of repricing activity on investment yields was increased to some
extent, for both the three and nine month periods ended September 30, 2002, by
the change in portfolio mix and shortening of portfolio duration. The
Corporation also carried on average $22.9 million and $18.4 million, in
short-term institutional money market funds as compared with $23.3 million and
$11.5 million for the comparable three and nine month periods in 2001,
respectively. These funds carried significantly lower rates than other
securities in the portfolio (on average 1.84 percent and 1.92 percent for the
three and nine month periods, respectively, compared to 3.49 percent and 4.76
percent earned on these overnight funds for the comparable period in 2001) and
contributed to the decline in yield as compared to the comparable periods in
2001. The increased volume of such overnight funds for the nine month periods
was for liquidity purposes.
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. For the
three and nine-month period ended September 30, 2002 the Corporation sold from
its available-for-sale portfolio securities totaling approximately $4.2 million
and $38.7 million, respectively.
At September 30, 2002 the net unrealized gain carried as a component of other
comprehensive income and included in shareholders' equity net of tax amounted to
a net unrealized gain of $2.116 million as compared with an unrealized gain of
$1.120 million at December 31, 2001 and an unrealized gain of $2.349 million at
September 30, 2001, resulting from a decline in interest rates fostered by the
Federal Open Market Committee's actions to lower the Federal Funds target rate
as an economic stimulus.
Loans
Loan growth during the nine months ended September 30, 2002 occurred primarily
in the residential 1-4 family and commercial, construction and commercial real
estate loan portfolio. This growth resulted from the Corporation's business
development efforts enhanced by the Corporation's entry into new markets through
expanded branch facilities. The decrease in the loan portfolio yields for the
three and nine month periods was the result of the decline in interest rates as
compared with the comparable period in 2001, coupled with a competitive rate
pricing structure maintained by the Corporation to attract new loans and by the
heightened competition for lending relationships that exists in the
Corporation's market. The 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.
Analyzing the loan portfolio for the nine-months ended September 30, 2002,
average loan volume increased $16.9 million or 8.3 percent, while portfolio
yield decreased by 73 basis points as compared with the same period in 2001. The
volume related factors during the period contributed increased revenue of
$910,000 while rate related changes resulted in a decline in interest income of
$1,177,000. Total average loan volume increased to $221.614 million with a net
interest yield of 6.77 percent, as compared to $204.671 million with a yield of
7.50 percent for the nine months ended September 30, 2001.
14
For the three months ended September 30, 2002, average loan volume increased
$18.3 million or 8.7 percent, while portfolio yield decreased by 76 basis points
as compared with the same period in 2001. The volume related factors during the
period contributed increased revenue of $324,000 while rate related changes
resulted in a decline in revenue of $420,000. Total average loan volume
increased to $228.764 million with a net interest yield of 6.67 percent, as
compared to $210.472 million with a yield of 7.43 percent for the three months
ended September 30, 2002.
Allowance for Loan Losses
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
inherent in the loan portfolio based upon a periodic evaluation of the risk
characteristics of the loan portfolio. The amount of the loan loss provision and
the level of the allowance for loan losses are critical accounting policies of
the Corporation. 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, a review of peer group 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 September 30, 2002,
the allowance amounted to $2,381,000 as compared to $2,191,000 at December 31,
2001, and $2,119,000 at September 30, 2001. The Corporation made a provision to
the allowance for loan losses during the three and nine month periods ended
September 30, 2002 amounting to $90,000 and $270,000, respectively, compared to
$256,000 and $514,000 during the three and nine month periods ended September
30, 2001, respectively. The additions to the provision during the three and nine
month periods discussed was commensurate with the loan volume recorded during
the respective periods and increased focus on the changing composition of the
commercial and residential real estate loan portfolios.
At September 30, 2002, the allowance for loan losses amounted to 1.05 percent of
total loans, as compared with 1.00 percent at September 30, 2001. In
management's view, the level of the allowance as of September 30, 2002 is
adequate to cover losses inherent in the loan portfolio. The Corporation's
statements herein regarding the adequacy of the allowance for loan losses
constitute "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 changes. 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 examinations. Future adjustments to the allowance may be necessary
due to economic, operating, regulatory, and other conditions beyond the
Corporation's control. To the extent actual results differ from forecasts or
management's judgment the allowance for loan losses may be greater or less than
future charge-offs.
During the three and nine-month periods ended September 30, 2002 and 2001, the
Corporation did not experience any substantial credit problems within its loan
portfolio. For the nine months ended September 30, 2002, net charge-offs were
approximately $80,000 and were comprised of a commercial and installment loans.
On October 11, 2002, the corporation recovered $48,186.32 representing the full
amount of the commercial loan charge-off. The Corporation had total charge-offs
of $50,000 for the comparable period in 2001, comprised of installment loans.
At September 30, 2002 the Corporation had non-accrual loans amounting to
$233,000 as compared with $109,000 at December 31, 2001 and $311,000 at
September 30, 2001. The Corporation continues to aggressively pursue collections
of principal and interest on loans previously charged-off. The increase in such
loans in 2002 was attributable to a $139,900 fixed rate home equity loan.
15
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 dependant. 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 September 30, 2002, total impaired loans were
approximately $2,234,000 compared to $1,859,000 at December 31, 2001 and
$1,985,000 at September 30, 2001. Although classified as substandard, impaired
loans (other than those in non-accrual status) were current with respect to
principal and interest payments.
Changes in the allowance for possible loan losses for the nine-month periods
ended September 30, 2002 and 2001, respectively, are set forth below.
Allowance for loan losses
(Dollars in thousands)
Nine Months Ended September 30,
2002 2001
--------------- ---------------
Average loans outstanding $ 221,614 $ 204,671
--------------- ---------------
Total loans at end of period 226,656 211,879
--------------- ---------------
Analysis of the allowance for loan losses
Balance at the beginning of year 2,191 1,655
Charge-offs:
Commercial 48 0
Real estate-mortgage 0 0
Installment loans 45 53
--------------- ---------------
Total charge-offs 93 53
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 13 3
--------------- ---------------
Total recoveries 13 3
Net Charge-offs: 80 50
--------------- ---------------
Provision for Loan Losses 270 514
=============== ===============
Balance at end of period $ 2,381 $ 2,119
=============== ===============
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.00036% 0.00024%
--------------- ---------------
Allowance for loan losses as a percentage of total loans 1.05% 1.00%
--------------- ---------------
Asset Quality
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
analysis of credit requests and ongoing examination of outstanding loans and
delinquencies, with particular attention to portfolio dynamics and mix. The
Corporation strives to identify loans experiencing difficulty early enough to
correct the problems, to record charge-offs promptly based on realistic
assessments of current collateral values, and to maintain an adequate allowance
for loan losses at all times. These practices have protected the Corporation
during economic downturns and periods of uncertainty.
It is generally the Corporation's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of ninety
days. When a loan is placed on non-accrual status, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. 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.
16
At September 30, 2002, December 31, 2001 and September 30, 2001, the Corporation
had no restructured loans. Non-accrual loans amounted to $233,000 at September
30, 2002, and were comprised of three home equity and two auto loans. At
December 31, 2001, non-accrual loans amounted to $109,000 and were comprised of
first and second lien residential mortgages. At September 30, 2001, non-accrual
loans amounted to $311,000 and were comprised of first and second lien
residential mortgages. At September 30, 2002 the Corporation did not have any
loans 90 days past due and still accruing. Such loans amounted to $8,000 at
December 31, 2001 and $107,000 at September 30, 2001.
The outstanding balances of accruing loans, which are 90 days or more past due
as to principal or interest payments and non-accrual loans at September 30,
2002, December 31, 2001 and September 30, 2001, were as follows:
Non-Performing Assets At
September 30, December 31, September 30,
(Dollars in thousands) 2002 2000 2001
--------------- --------------- ---------------
Loans past due 90 days and still accruing $ 0 $ 8 $ 107
Non-accrual loans 233 109 311
--------------- --------------- ---------------
Total, non-performing loans $ 233 $ 117 $ 418
=============== =============== ===============
Total Non-performing Assets $ 233 $ 117 $ 418
--------------- --------------- ---------------
At September 30, 2002, non-performing assets, consisting of loans on non-accrual
status plus other real estate owned (OREO), amounted to $233,000 or .10 percent
of total loans outstanding as compared to $109,000 or .05 percent at December
31, 2001 and $311,000 or .15 percent at September 30, 2001.
At September 30, 2002, other than the loans set forth above, the Corporation is
not aware of any loans which present serious doubts as to the ability of its
borrowers to comply with the present loan and repayment terms and which are
expected to fall into one of the categories set forth in the table above. At
September 30, 2002, December 31, 2001 and September 30, 2001 the Corporation did
not have any other real estate owned.
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three and nine month periods ended September 30, 2002 and 2001.
Three Months Ended Nine Months Ended
(dollars in thousands) September 30, September 30,
2002 2001 % change 2002 2001 % change
------------ ------------ ------------ ------------ ------------ ------------
Other income:
Service charges, commissions and fees $ 409 $ 391 4.6 $ 1,183 $ 1,178 0.4
Bank Owned Life Insurance 193 143 35.0 564 226 141.6
Other income 114 67 70.1 279 258 8.1
Net gains on securities sold 203 28 625.0 445 180 147.2
------------ ------------ ------------ ------------ ------------ ------------
Total other income $ 919 $ 629 46.1 $ 2,471 $ 1,842 34.1
============ ============ ============ ============ ============ ============
For the nine-month period ended September 30, 2002, total other (non-interest)
income increased $629,000 or 34.1 percent as compared to the comparable
nine-month period in September 2001. Other non-interest income, exclusive of
gains on securities sold (which increased $265,000 or 147.2 percent), reflects
an increase of $364,000 or 21.9 percent compared with the comparable nine-month
period ended September 30, 2001. This increased revenue was primarily driven by
the increase in the cash surrender value of bank owned life insurance, which
amounted to $564,000 for the nine months ended September 30, 2002 as compared to
$226,000 for the comparable period in 2001. Other income, excluding BOLI income
and gains on securities sold and service charges, commission and fees, reflected
an increase of $21,000 or 8.1 percent due primarily to higher letter of credit
fees during the nine months ended September 30, 2002 as compared with the
comparable period in 2001.
17
For the three month period ended September 30, 2002, total other (non-interest)
income increased $290,000 or 46.1 percent as compared to the comparable
three-month period in September 2001. Other non-interest income, exclusive of
net gains on securities sold (which increased $175,000 or 625.0 percent),
reflects an increase of $115,000 or 19.1 percent compared with the comparable
three month period ended September 30, 2001. This increased revenue was
primarily driven by the increase in the cash surrender value of bank owned life
insurance, which amounted to $193,000 for the three months ended September 30,
2002 as compared to $143,000 for the comparable period in 2001. Other income,
excluding BOLI income gains on securities sold and service charges, commission
and fees, reflected an increase of $47,000 or 70.1 percent due primarily to
higher loan servicing, loan fees and gains on sale of originated loans during
the three months ended September 30, 2002 as compared with the comparable period
in 2001.
For the three and nine month periods ended September 30, 2002 the Corporation
recorded net gains of $203,000 and $445,000 on securities sold from the
available-for-sale investment portfolio compared to gains of $28,000 and
$180,000 recorded in the 2001 comparable periods. These sales were made in the
normal course of business and proceeds were reinvested in securities.
Other Non-Interest Expense
The following table presents the principal categories of non-interest expense
for the three and nine month periods ended September 30, 2002 and 2001.
(dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 % change 2002 2001 % change
------------ ------------ ------------ ------------ ------------ ------------
Other expense:
Salaries and employee benefits $ 2,373 $ 1,959 21.1 $ 6,955 $ 5,665 22.8
Occupancy expense, net 395 364 8.5 1,233 1,168 5.6
Premise & equipment expense 388 390 (0.5) 1,172 1,058 10.8
Stationery and printing expense 115 107 7.5 419 334 25.4
Marketing & Advertising 122 92 32.6 478 350 36.6
Legal and Consulting 86 180 (52.2) 331 486 (31.9)
Other expenses 706 669 5.5 2,269 2,063 10.0
------------ ------------ ------------ ------------ ------------ ------------
Total other expense $ 4,185 $ 3,761 11.3 $ 12,857 $ 11,124 15.6
============ ============ ============ ============ ============ ============
For the nine month period ended September 30, 2002 total other (non-interest)
expenses increased $1.733 million or 15.6 percent over the comparable nine
months ended September 30, 2001, with increased salary and benefit expense, Bank
premise and equipment, stationary and printing and marketing and advertising
accounting for most of the increase. Pursuant to SFAS No. 142 "Goodwill and
Intangible Assets", there was no amortization expense in 2002. For the three and
nine months ended September 30 2001, other expense included amortization expense
of $81,000 and $242,000 respectively. The period-to-period increases in other
operating expenses also include the costs of higher data processing and
technology costs.
For the three months ended September 30, 2002, total other (non-interest)
expenses increased $424,000 or 11.3 percent over the comparable three-months
ended September 30, 2001, with increased salary and benefit expense, and
occupancy expense accounting for most of the increase.
The levels of operating expenses during both the three and nine month periods of
2002 were unfavorably impacted by an increase in several expense categories. The
year to year increase in expenses are primarily attributable to the continued
investment in technology and the need to attract, develop, and retain high
caliber employees. The Corporation's ratio of other expenses (annualized) to
average assets decreased to 2.33 percent in the first nine months of 2002 from
2.51 percent for the first nine months of 2001. The Corporation's efficiency
ratio (defined as non-interest expenses divided by tax-equivalent net interest
income plus recurring non-interest income) at September 30, 2002 was 58.2
percent compared to 61.5 percent at September 30, 2001.
18
Salaries and employee benefits increased $1.290 million or 22.8 percent in the
nine months of 2002 over the comparable nine month period ended September 30,
2001. This increase is primarily attributable to normal merit increases,
promotional raises and higher benefit costs and to the opening of the Town Hall
banking center. Staffing levels overall increased to 180 full-time equivalent
employees at September 30, 2002 compared to 168 full-time equivalent employees
at September 30, 2001. For the three months ended September 30, 2002, salaries
and benefits increased $414,000 or 21.1 percent. This increase is primarily
attributable to higher staffing levels, as well as higher benefit costs.
For the nine months ended September 30, 2002 occupancy and premises and
equipment expense increased $179,000 or 8.0 percent over the comparable
nine-month period in 2001. The increase in occupancy and Bank premise and
equipment expenses reflects the expense associated with higher operating costs
(utilities, rent, real-estate taxes and general repair and maintenance) of the
Corporation's expanded facilities, as well as higher equipment and maintenance
cost and depreciation expense of the expanded bank facilities. For the three
months ended September 30, 2002, expenses increased $29,000 or 3.8 percent as
compared with the comparable three month period in 2001.
Stationery and printing expenses increased 25.4 percent or $85,000 for the nine
months ended September 30, 2002 as compared with the comparable period in 2001,
primarily attributable to the opening of the new Townhall banking Center in
Morristown, increased account activity and the destruction of obsolete forms and
supplies.
Marketing and advertising expenses increased 36.6 percent or $128,000 for the
nine months ended September 30, 2002, as compared with the comparable period in
2001, primarily attributable to the opening of the new Townhall Banking Center
in Morristown and the promotion of deposit and loan products. For the three
months ended September 30, 2002, marketing and advertising expenses increase
32.6 percent or $30,000 as compared to the prior year third quarter, primarily
as a result of the advertising of loan products.
Legal and consulting expense decreased $155,000 or 31.9 percent and $94,000 or
52.2 percent for the nine and three month periods ended September 30, 2002
compared to 2001 periods. The decrease in the expense category is attributable
to a reduction in consulting expenses.
Other expenses increased 10.0 percent or $206,000 for the nine months ended
September 30, 2002 as compared with the comparable period in 2001, primarily
correspondent fees, computer expense and communication expense. For the three
months ended September 30, 2002, other expenses increased 5.5 percent or $37,000
as compared to the prior year third quarter.
Provision for Income Taxes
The Corporation's provision for income taxes increased from 2001 to 2002,
primarily as a result of higher levels of taxable income. The effective tax
rates for the Corporation for the periods ended September 30, 2002 and 2001 were
32.1 percent, and 34.1 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 deductions associated with,
income from investments in tax-advantaged assess such as tax exempt securities
and Bank Owned Life Insurance and disallowed expense items for tax purposes,
such as travel and entertainment expense, as well as amortization of goodwill.
Tax deductions associated with tax-advantaged assets increased by $436,000 or
75.3 percent from 2001 to 2002.
The New Jersey legislature passed the New Jersey Business Tax Reform Act with
new tax law changes to the Corporation Business Tax ("CBT") on July 2, 2002.
Management has reviewed the implications of the new tax law, which are
retroactively effective to January 1, 2002. The enactment of the new legislation
will not have a material impact on the future tax liability and subsequent New
Jersey Corporate Business Tax expense.
Asset Liability Management
The composition and mix of the Corporation's assets and liabilities is planned
and monitored by the Asset and Liability Committee (ALCO). Asset and Liability
management encompasses the control of interest rate risk (interest sensitivity
management) and the ongoing maintenance and planning of liquidity and capital.
In general, management's objective is to optimize net interest income and
minimize interest rate risk by monitoring these components of the statement of
condition.
19
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 and fall in interest rates ("rate shock"), as well as gradual changes in
interest rates over a 12 month time period. The model is based on the actual
maturity and repricing characteristics of interest-rate sensitive assets and
liabilities. The model incorporates assumptions regarding earning-asset and
deposit growth, prepayments, interest rates and other factors. Management
believes that both individually and taken together, these assumptions are
reasonable, but the complexity of the simulation modeling process results in a
sophisticated estimate, not an absolutely precise calculation, of exposure. For
example, estimates of future cash flows must be made for instruments without
contractual maturity or payment schedules.
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 September 30, 2002
and assuming that Management does not take action to alter the outcome, the
Corporation would expect a increase of 1.05 percent in net interest income if
interest rates decreased 100 basis points from 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 September 30,2002, the Corporation would expect a
decrease of 5.46% in net interest income if interest rates increased 200 basis
points from current rates in an immediate and parallel shock over a 12-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.
20
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 September 30, 2002, the Corporation reflects a negative interest sensitivity
gap (or an interest sensitivity ratio) of 1.07: at the cumulative one-year
position. During 2001, the Corporation had a negative interest sensitivity gap.
The maintenance of a liability-sensitive position during 2001 and for the
nine-months ended September 30, 2002 had a favorable impact on the Corporation's
net interest margins; based on management's perception that interest rates will
continue to be volatile, emphasis has been, and is expected to continue to be,
placed on interest-sensitivity matching with the objective of stabilizing the
net interest spread during 2002. However, no assurance can be given that this
objective will be met.
Liquidity
The liquidity position of the Corporation is dependent on successful management
of its assets and liabilities so as to meet the needs of both deposit and credit
customers. Liquidity needs arise principally to accommodate possible deposit
outflows and to meet customers' requests for loans. Scheduled principal loan
repayments, maturing investments, short-term liquid assets and deposit in-flows,
can satisfy such needs. The objective of liquidity management is to enable the
Corporation to maintain sufficient liquidity to meet its obligations in a timely
and cost-effective manner.
Management monitors current and projected cash flows, and adjusts positions as
necessary to maintain adequate levels of liquidity. By using a variety of
potential funding sources and staggering maturities, the risk of potential
funding pressure is somewhat reduced. Management also maintains a detailed
liquidity contingency plan designed to adequately respond to situations which
could lead to liquidity concerns.
Anticipated cash-flows at September 30, 2002, projected to October of 2003,
indicate that the Bank's liquidity should remain strong, with an approximate
projection of $312.9 million in anticipated cash flows over the next twelve
months. This projection represents a forward-looking statement under the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from this projection depending upon a number of factors, including the liquidity
needs of the Bank's customers, the availability of sources of liquidity and
general economic conditions.
The Corporation derives a significant portion of its liquidity from its core
deposit base. For the nine-month period ended September 30, 2002, core deposits
(comprised of total demand, savings accounts (excluding Super Max) and money
market accounts under $100,000 remained relatively stable and represented 49.0
percent of total deposits as compared with 54.1 percent at September 30, 2001.
More volatile rate sensitive deposits, concentrated in time certificates of
deposit greater than $100,000, for the nine-month period ended September 30,
2002, decreased to 5.6 percent of total deposits from 7.2 percent during the
nine-months ended September 30, 2001. This change has resulted from a $121.2
million increase in total deposits for the nine-months ended September 30, 2002
compared to the prior year period.
Short-term borrowings can be used to satisfy daily funding needs. Balances in
these accounts fluctuate significantly on a day-to-day basis. The Corporation's
principal short-term funding sources are securities sold under agreements to
repurchase, advances from the Federal Home Loan Bank and Federal funds
purchased. Average short-term borrowings during the nine-months ended September
30, 2002 were $133.5 million, an increase of $23.0 million or 20.8 percent from
$110.5 million in average short-term borrowings during the comparable
nine-months ended September 30, 2001.
21
During the nine-months ended September 30, 2002, average funding sources
increased by approximately $137.8 million or 25.3 percent, compared to the same
period in 2001. Interest-bearing deposit liabilities increased approximately
$89.4 million on average and were comprised primarily of increases in savings
deposits, money market and short-term borrowings and an increase in time
deposits due to a deposit promotion. Non-interest bearing funding sources as a
percentage of the total funding mix decreased to 16.1 percent on average as
compared to 17.4 percent for the nine-month period ended September 30, 2001.
This is primarily attributable to a more rapid growth in non-deposit funding
sources as a percentage of the funding base as compared with overall deposit
growth.
Cash Flow
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. During the nine
months ended September 30, 2002, cash and cash equivalents (which decreased
overall by $10.3 million) were provided (on a net basis) by financing activities
(approximately $65.4 million) primarily due to an increase in deposits of $52.7
million coupled with a $14.2 million net increase in borrowings, and by
operating activities ($8.3 million). Approximately $84.1 million was used in net
investing activities; principally a $15.5 million increase in loans and a $66.4
million increase in the investment portfolio.
Stockholders' Equity
Total stockholders' equity averaged $47.8 million or 6.49 percent of average
assets for the nine month period ended September 30, 2002, as compared to $42.0
million, or 7.11 percent, during the same period in 2001. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $876,000 in
new capital for the nine-months ended September 30, 2002 as compared with
$493,000 for the comparable period in 2001. Book value per common share was
$11.90 at September 30, 2002 as compared to $10.66 at September 30, 2001.
Tangible book value per common share was $11.40 at September 30, 2002 and $10.14
at September 30, 2001.
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.
The Corporation, as of September 30, 2002, had repurchased 16,000 shares at an
average cost per share of $20.37 under a previously announced stock buyback
program, which authorized the repurchase of up to 120,750 shares.
Risk-Based Capital/Leverage
Banking regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at September 30, 2002, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.00% and 8.00%, respectively.
At September 30, 2002, total Tier 1 capital (defined as tangible stockholders'
equity for common stock and certain perpetual preferred stock) amounted to $55.8
million or 7.31 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, which amounted to $2.1 million of net unrealized gains, after tax,
on securities available-for-sale (included as a component of other comprehensive
income) and goodwill of approximately $2.1 million as of September 30, 2002. At
September 30, 2002, the Corporation's Tier I risk-based and total risk-based
capital ratios were 11.56 percent and 12.06 percent, respectively. These ratios
are well above the minimum guidelines of capital to risk-adjusted assets in
effect as of September 30, 2002.
Under prompt corrective action regulations, bank regulators are required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of financial institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
22
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 September 30, 2002,
management believes that the Bank meets all capital adequacy requirements to
which it is subject.
Item 3 - Qualitative and Quantitative Disclosures about Market Risks
The primary market risk faced by the Corporation is interest rate risk. The
Corporation's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
response to changing market and rate conditions.
The Corporation's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest in alternative interest rate scenarios. Management reviews
and refines its interest rate risk management process in response to the
changing economic climate.
Currently, the Corporation's model projects a 200 basis point change in rates
during the first year, in even monthly increments, with rates held constant in
the second year. The Corporation's ALCO has established that interest income
sensitivity will be considered acceptable if net interest income in the above
interest rate scenario does not exceed 10 percent of net interest income over a
12-month horizon to a +200 basis point shock in rates the first year and so that
the present value of equity at risk does not exceed 15 percent when compared to
the forecast. Year 2 will not carry a policy limit, due to the inaccuracies
inherent with longer-term projections. Generally, year 2 is calculated and
identified for review and presentation purposes only.
At September 30, 2002, the Corporation's income simulation model indicates an
acceptable level of interest rate risk, with no significant change from June 30,
2002.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and duration of deposits, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions that ALCO could undertake in response to changes in interest rates.
Item 4 - Controls and Procedures
Within the 90 days prior to the date of this report, the Corporation carried out
an evaluation, under the supervision and with the participation of the
Corporation's management, including the Corporation's Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Corporation's disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-14. Based upon the evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's periodic SEC filings.
There have been no significant changes in the Corporation's internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
II. OTHER INFORMATION
Item 1 Legal Proceedings
The Corporation is subject to claims and lawsuits, which arise primarily in the
ordinary course of business. Based upon the information currently available, 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. This
statement represents a forward-looking statement under the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from this
statement, primarily due to the uncertainties involved in the legal processes.
23
Item 6 Exhibits and Reports on Form 8-K
A) Exhibits:
99.1 Certification by Anthony C. Weagley under Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by John J. Davis under Section 906 of the
Sarbanes-Oxley Act of 2002.
B) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf, by the
undersigned, thereunto duly authorized.
CENTER BANCORP, INC.
DATE: November 14, 2002 /s/ Anthony C. Weagley
----------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
24
CERTIFICATION
I, John J. Davis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Center Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
25
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John J. Davis
- -----------------
Name: John J. Davis
Title: President and Chief Executive Officer of Center Bancorp, Inc.
26
CERTIFICATION
I, Anthony C. Weagley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Center Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
27
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Anthony C. Weagley
- ----------------------
Name: Anthony C. Weagley
Title: Treasurer and Chief Financial Officer of Center Bancorp, Inc.
28
EXHIBIT INDEX
Exhibit
99.1 Certification of Anthony C. Weagley under Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification of John J. Davis under Section 906 of the Sarbanes-Oxley
Act of 2002.
29