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UNITED STATES SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
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.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 52-1273725
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2455 MORRIS AVENUE, UNION, NEW JERSEY 07083
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(Address of principal executives offices) (Zip Code)
(908) 688-9500
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(Registrant's telephone number, including area code)
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|_|
COMMON STOCK, NO PAR VALUE: 8,459,520 SHARES
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(Title of Class) (Outstanding at April 30, 2003 as
restated to reflect the 2-for-1common stock split declared April 15, 2003,
payable June 2, 2003 to common stockholder of record May 19, 2003.)
1
CENTER BANCORP, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Condition
at March 31, 2003 (Unaudited) and December 31, 2002 4
Consolidated Statements of Income for the
three -months ended March 31, 2003 and 2002 5
(Unaudited)
Consolidated Statements of Cash Flows for the
three-months ended March 31, 2003 and 2002 6
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-22
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT 23
MARKET RISKS
ITEM 4. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
Signatures 25
Management Certifications 26-30
2
PART I- FINANCIAL INFORMATION
The following unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X, and accordingly do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. However, in
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2003. The Center Bancorp Inc., 2002 annual report on form 10-K should be
read in conjunction with these statements.
3
CENTER BANCORP, INC.
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002
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(UNAUDITED)
ASSETS:
Cash and due from banks $ 26,725 $ 23,220
Federal funds sold - 0
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Total cash and cash equivalents 26,725 23,220
Investment securities held to maturity (approximate
market value of $230,027 in 2003 and $219,921 in 2002) 225,023 214,902
Investment securities available-for-sale 346,040 322,717
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TOTAL INVESTMENT SECURITIES 571,063 537,619
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Loans, net of unearned income 243,530 229,051
Less - Allowance for loan losses 2,581 2,498
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NET LOANS 240,949 226,553
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Premises and equipment, net 13,190 12,976
Accrued interest receivable 4,913 4,439
Bank owned separate account life insurance 14,323 14,143
Other assets 2,657 2,395
Goodwill 2,091 2,091
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TOTAL ASSETS 875,911 823,436
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LIABILITIES
Deposits:
Non-interest bearing $ 119,920 $ 116,984
Interest bearing:
Certificates of deposit $100,000 and over 46,092 33,396
Savings and time deposits 414,084 465,971
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TOTAL DEPOSITS 580,096 616,351
Federal funds purchased and securities sold under
agreements to repurchase 92,294 75,431
Federal Home Loan Bank advances 135,000 65,000
Corporation - obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior subordinated
debentures of the Corporation 10,000 10,000
Accounts payable and accrued liabilities 6,105 5,600
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TOTAL LIABILITIES 823,495 772,382
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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 9,507,402 and
9,499,114 shares in 2003 and 2002, respectively 19,089 18,984
Additional paid in capital 4,597 4,562
Retained earnings 30,832 29,863
Treasury stock at cost (1,053,670 and 1,078,404 Shares in 2003
and 2002, respectively) (4,156) (4,254)
Restricted stock (28) (285)
Accumulated other comprehensive income 2,082 2,184
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TOTAL STOCKHOLDERS' EQUITY 52,416 51,054
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 875,911 $ 823,436
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All common share and per common share amounts have been restated to reflect the
2- for-1 common stock split declared April 15, 2003, payable June 2, 2003 to
common stockholders of record May 19, 2003.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
CENTER BANCORP, INC
Consolidated Statements of Income
(unaudited)
Three Months Ended
(Dollars in thousands) March 31,
- -------------------------------------------------------------------------------------------------------
2003 2002
Interest income:
Interest and fees on loans $ 3,586 $ 3,673
Interest and dividends on investment securities:
Taxable interest income 5,545 6,552
Nontaxable interest income 307 151
Interest on Federal funds sold and securities
purchased under agreement to resell - 2
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TOTAL INTEREST INCOME $ 9,438 $ 10,378
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Interest expense:
Interest on certificates of deposit $100,000 or more 152 174
Interest on savings and time deposits 1,797 2,191
Interest on borrowings 1,286 1,312
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Total interest expense 3,235 3,677
Net interest income 6,203 6,701
Provision for loan losses 80 90
Net interest income after provision for loan losses 6,123 6,611
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Other income:
Service charges, commissions and fees 417 379
Other income 111 70
BOLI 180 180
Gain on securities sold 231 186
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TOTAL OTHER INCOME $ 939 $ 815
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Other expense:
Salaries and employee benefits 2,651 2,300
Occupancy expense, net 528 456
Premises and equipment expense 447 389
Stationery and printing expense 174 156
Marketing and advertising 177 193
Other expenses 756 961
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TOTAL OTHER EXPENSE $ 4,733 $ 4,455
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Income before income tax expense 2,329 2,971
Income tax expense 643 936
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NET INCOME $ 1,686 $ 2,035
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Earnings per share
Basic $ 0.20 $ 0.24
Diluted $ 0.20 $ 0.24
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Average weighted common shares outstanding
Basic 8,440,622 8,346,330
Diluted 8,529,786 8,415,460
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All common share and per common share amounts have been adjusted to reflect the
2-for-1 common split declared April 15, 2003 and payable June 2, 2003 to common
stockholders of record May 19, 2003.
See Accompanying Notes To Consolidated Financial Statements
5
CENTER BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
(Dollars in thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,686 $ 2,035
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 442 414
Provision for loan losses 80 90
Gain on sales of investment securities available-for-sale (231) (186)
Increase in accrued interest receivable (474) (723)
Increase in other assets (262) (641)
Increase in cash surrender vlaue of BOLI (180) (181)
Increase in other liabiities 505 567
Amortization of premium and accretion of
discount on investment securities, net 1,386 285
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Net cash provided by operating activities $ 2,952 $ 1,660
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale $ 75,704 $ 48,592
Proceeds from maturities of securities held-to-maturity 53,330 24,519
Proceeds from sales of investment securities available-for-sale 52,667 13,348
Purchase of securities available-for-sale (148,894) (61,744)
Purchase of securities held-to-maturity (63,824) (51,979)
Purchase of FRB and FHLB stock, net (3,685) (1,680)
Net increase in loans (14,476) (5,332)
Property and equipment expenditures, net (656) (1,256)
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NET CASH (USED IN) INVESTING ACTIVITIES (49,834) (35,532)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (36,255) 40,707
Dividends paid (716) (596)
Proceeds from issuance of common stock 495 471
Net increase (decrease) in borrowings 86,863 (11,079)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 50,387 29,503
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,505 (4,369)
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Cash and cash equivalents at beginning of period 23,220 29,668
Cash and cash equivalents at end of period $ 26,725 $ 25,299
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid on deposits and short-term borrowings: $ 3,017 $ 3,671
Income taxes $ (3) $ 877
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Center Bancorp, Inc. (the Corporation)
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly owned subsidiaries, Union Center National Bank (the Bank) and
Center Bancorp Statutory Trust I. All significant inter-company accounts and
transactions have been eliminated from the accompanying consolidated financial
statements.
BUSINESS
The Bank provides a full range of banking services to individual and corporate
customers through branch locations in Union and Morris Counties, New Jersey. The
Bank is subject to competition from other financial institutions, is subject to
the regulations of certain federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statement of condition and revenues and
expenses for the reported period. Actual results could differ significantly from
those estimates.
NOTE 2:
RECENT ACCOUNTING PRONOUNCEMENTS
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.
The initial adoption of SFAS 145 did not have a significant impact on the
Corporation's consolidated financial statements.
SFAS NO. 146
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
SFAS NO. 147
In October, 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions- an amendment to FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. The provisions of Statement No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
7
Statement No. 147 clarifies that a branch acquisition that meets the definition
of a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of Statement No. 147
are effective October 1, 2002. The initial adoption of this statement did not
have any impact on the Corporation's consolidated financial statements.
SFAS NO. 148
In December 2002, The Financial Accounting Standards Board (FASB) released
Statement No. 148 "Accounting for Stock-Based Compensation- Transition and
Disclosure." This statement amends FASB Statement No 123, "Accounting for Stock
Based Compensation" and provides alternative methods of transition for companies
that choose to change to the fair value method of accounting for stock options.
Statement No. 148 also amends the disclosure requirements for stock-based
compensation of FASB Statement 123, regardless of the method of accounting
chosen. Under the new standard companies must disclose certain types of
information, about stock-based employee compensation, more prominently in both
the annual and interim financial statements.
The transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal periods ending after December 15, 2002, with earlier
application permitted under certain circumstances. The Corporation adopted the
expanded disclosure requirements under Statement No. 148 effective December 31,
2002. Note 4 contains the disclosure requirements about stock-based employee
compensation for the interim financial period for the three months ended March
31, 2003 and for the comparable period of 2002.
NOTE 3 - COMPREHENSIVE INCOME
The following table outlines the Corporation's comprehensive income for the
three months ended March 31, 2003 and 2002
THREE MONTHS
ENDED MARCH 31,
(DOLLARS IN THOUSANDS) 2003 2002
- ----------------------------------------------------------------------------------
Net Income $ 1,686 $ 2,035
Other comprehensive income
Unrealized holding (losses) on securities arising
during the period, net of taxes (254) (703)
Less reclassification of adjustment for gains
included in net income (net of tax benefit) 152 123
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Other total comprehensive income (loss) (102) (580)
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Total comprehensive income $ 1,584 $ 1,455
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8
NOTE 4 - EARNINGS PER SHARE RECONCILEMENT
The following is a reconcilement of the calculation of basic and dilutive
earnings per share.
THREE MONTHS
ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
- -------------------------------------------------------------------------------------
Net Income $ 1,686 $ 2,035
Weighted Average Shares 8,441 8,346
Effect of Dilutive Stock Options 89 69
Total Weighted Average Dilutive Shares $ 8,530 $ 8,415
Basic Earnings per Share 0.20 0.24
Diluted Earnings per share 0.20 0.24
- --------------------------------------------------------------------------------------
======================================================================================
All common share and pen common share amount have been adjusted to reflect the
2-for-1 common stock split declared April 15, 2002 and payable June 2, 2003 to
common stockholders of record May 19, 2003.
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value reorganization provision of FASB
Statement No. 123, accounting for stock based compensation, to the Corporation's
stock option plans.
Three Months
Ended March 31,
(In thousands, except per share data 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Net income, as reported $1,686 $2,035
Add: Compensation expense recognized for restricted stock award, net of related
tax effect 0 0
Deduct: Total stock - based employee compensation expense determined under fair
value based method, all awards, net of related tax effect 16 13
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Pro forma net income $1,670 $2,022
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Earnings per share:
Basic - as reported $.20 $.24
Basic - pro forma $.20 $.24
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Diluted - as reported $.20 $.24
Diluted - pro forma $.20 $.24
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All Common share and per common share amounts have been restated to reflect the 2-for-1 common stock split declared
April 15, 2003 and payable June 2, 2003 to common stockholders for record May 19, 2003.
9
ITEM 2-MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANICAL ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Corporation's business is dynamic and complex. Consequently, management must
exercise judgment in choosing and applying accounting policies and
methodologies. These choices are important; not only are they necessary to
comply with accounting principles generally accepted in United States, they also
reflect the exercise of management's judgment in determining the most
appropriate manner in which to record and report the Corporation's overall
financial performance. All accounting policies are important, and all policies
contained in Note 1 ("Summary of Significant Accounting Policies"), which begins
on page 7 of the Corporation's 2002 annual report on Form 10K, should be
reviewed for greater understanding of how the Corporation's financial
performance is recorded and reported.
In management's opinion, some areas of accounting are likely to have a more
significant effect than others on the Corporation's financial results and expose
those results to potentially greater volatility. This is because they apply to
areas of relatively greater business importance and/or require management to
exercise judgment in making assumptions and estimates that affect amounts
reported in the financial statements. Because these assumptions and estimates
are based on current circumstances, they may change over time or prove to be
inaccurate based on actual experience. For the Corporation, the area that relies
most heavily on the use of assumptions and estimates includes but is not limited
to accounting for the allowance for loan losses. Our accounting policies related
to this area are discussed in Note 1 of the Corporation's 2002 Annual Report on
form 10 K, and further described on page 16 of this quarterly report on Form
10-Q under "Allowance for Loan Losses and Related Provision."
EARNINGS ANALYSIS
Net income for the three-months ended March 31, 2003 amounted to $1,686,000 as
compared to $2,035,000 earned for the comparable three-month period ended March
31, 2002. On a per diluted share basis, earnings decreased to $.20 per share as
compared with $.24 per share for the three-months ended March 31, 2002. All
common per share amounts have been restated to reflect the 2 for 1 stock split
declared April 15, 2003, payable June 2, 2003. The annualized return on average
assets decreased to .81 percent compared with 1.12 percent for the comparable
three-month period in 2002. The annualized return on average stockholders'
equity was 13.1 percent for the three-month period ended March 31, 2003 as
compared to 17.6 percent for the three-months ended March 31, 2002. Earnings
performance for the first quarter of 2002 primarily reflects a lower level of
net interest income increased non-interest income, a lower income tax expense,
and increased non-interest expense.
NET INTEREST INCOME/ MARGIN
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 borrowings, which support these assets. Net interest
income is presented below both in accordance with the Corporation's consolidated
financial statements and 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. Financial institutions typically analyze
earnings performance on a tax equivalent basis as a result of certain disclosure
obligations, which require the presentation of tax equivalent data and in order
to assist financial statement readers in comparing data from period to period.
10
NET INTEREST INCOME
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THREE MONTHS ENDED
MARCH 31, PERCENT
(Dollars in thousands) 2003 2002 Change
- ---------------------------------------------------------------------------------
Interest income:
Investments $6,010 $6,781 -11.37%
Loans, including fees 3,586 3,673 -2.37%
Federal funds sold and securities
sold under agreements to
repurchase 0 2 -100.00%
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Total interest income $9,596 10,456 -8.22%
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Interest expense:
Certificates $100,000 or more 152 174 -12.64%
Savings and Time Deposits 1,797 2,191 -17.98%
FHLB advances and other
borrowings 1,286 1,312 -1.98%
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Total interest expense 3,235 3,677 -12.02%
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Net interest income on a fully
tax-equivalent basis 6,361 6,779 -6.17%
Tax-equivalent adjustment (158) (78) -743%
Net interest income* $6,203 $6,701 -7.43%
- ---------------------------------------------------------------------------------
*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.
Net interest income on a fully tax-equivalent basis decreased $418,000 or 6.17
percent to $6.3 million for the three-months ended March 31, 2003, from $6.8
million For the comparable period in 2002. For the three- months ended March 31,
2003, the net interest margin yield or decreased to 3.35 percent from 4.08
percent due primarily to lower interest rates earned on interest-earning assets
offset by an increase in interest earning assets and a lower cost of funds. For
the three-months ended March 31, 2003, a decrease in the average yield on
interest earning assets of 123 basis points was offset in part by a decrease in
the average cost of interest-bearing liabilities of 63 basis points.
The 60 basis point decrease in the net interest spread was primarily a result
of the decreased yield or interest-earning assets, offset in part by the
Corporation's ability to continue to lower its costs of funds on interest
bearing deposits and borrowings. Average interest-earning assets increased by
$95.5 million, from the comparable three-month period in 2002. The net increase
in average interest-bearing liabilities was $89.4 million over the comparable
three-month period in 2002. The 2003 first quarter changes in average interest
earning-asset volumes resulted primarily from increased volumes of taxable and
non-taxable investment securities and loans, funded primarily by deposits and
increased borrowings.
For the three-month period ended March 31, 2003 interest income on a fully
tax-equivalent basis decreased by $860,000 or 8.22 percent from the comparable
three-month period in 2002. The primary factor contributing to the decrease was
the previously cited lower interest rates offset in part by an increase in
average earning-assets. The Corporation's loan portfolio increased on average
$21.9 million to $235.5 million from $213.5 million in the same quarter in
2002, primarily driven by growth in commercial loans, commercial mortgages and
home equity loans. This growth was funded primarily through an increase in
deposits and borrowings.
The factors underlying the year-to year changes in net interest income are
reflected in the tables appearing on page 12which has been presented on a
tax-equivalent basis (assuming a 34 percent tax rates). The table on page 13
(Average Statements of Condition with Interest and Average Rates) shows the
Corporation's consolidated average balance of assets, liabilities, and
stockholders' equity, the amount of income produced from interest-earning
assets and the amount of expense resulting from interest-bearing liabilities
and net interest income as a percentage of average interest-earning assets. The
table presented on page 12 (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 periods presented; 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.
11
The loan portfolio (traditionally the Corporation's highest yielding
earning-asset) represented, on average, approximately 30.6 percent of the
Corporation's interest earning-assets for the three-months ended March 31, 2003
as compared with 31.7 percent for the comparable period in 2002.
Average investment volume for the three-months ended March 31, 2003 increased
$74.2 million to $533.7 million compared to $459.5 million for the three months
of 2002. The growth in investments was primarily comprised of taxable
securities, which increased $59.1 million. Nontaxable securities, primarily
tax-free municipal bonds, increased $15.1 million as compared with the
comparable period in 2002.
Interest expense for the three-months ended March 31, 2003, decreased $442,000
or 12.0 percent from the comparable three-month period ended March 31, 2002, as
a result of a decrease in interest rates and higher amounts of lower cost
borrowings and time deposits. The $1.1 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 the $641,000 increases
in interest expense attributable to increased volume factors.
For the three-months ended March 31, 2003, the Corporation's net interest spread
on a tax-equivalent basis decreased to 3.07 percent from 3.67 percent for the
three-months ended March 31, 2002. This decrease in spread reflected a continued
contraction of spreads between yields earned on loans and investments and rates
paid for supporting funds. Net interest margins compressed 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 federal funds rate at a 41 year low of
1.25% for the first quarter of 2003,as compared to the first quarter of 2002
when the Federal Reserve's target rate stood at 1.75%. The continued decline in
interest rates created an acceleration of re-financing activity of
mortgage-related assets, which in turn has largely contributed to the further
decline in the portfolio yield on earning assets. The yield on interest earning
assets declined to 5.06 percent from 6.29 percent; this was offset in part by
lower rates paid for interest-bearing liabilities. The cost of total
interest-bearing liabilities decreased to 1.99 percent for the three-months
ended March 31, 2003 from 2.62 percent for the three-months ended March 31,
2002.
The contribution of non-interest-bearing sources (i.e. the differential between
the average rate paid on all sources of funds and the average rate paid on
interest-bearing sources) narrowed to approximately 32 basis points from 44
basis points during the three-month period ended March 31, 2003 in comparisons
to the comparable period in 2002. The growth in interest-bearing deposits was
not proportionate to the overall deposit growth experienced for the period and
outpaced the growth in non-interest bearing deposits. This trend reflects the
continued change in consumer preferences for interest-bearing accounts versus
non-interest bearing ones.
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 resultant
changes in the rates earned and paid by the Corporation.
2003/2002 INCREASE/(DECREASE)
Due to Change In:
---------------------------------------------------
Average Average Net
(DOLLARS IN THOUSANDS) Volume Rate Change
- ------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Investment Securities
Taxable $ 792 $ (1,799) $ (1, 007)
Non-taxable 249 (13) 236
Federal funds sold and securities
purchased under agreement to resell (2) - (2)
Loans, net of unearned income 357 (444) (87)
TOTAL INTEREST-EARNING ASSETS 1,396 (2,256) (860)
- ------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposits (36) (182) (218)
Savings deposits 1 (354) (353)
Time deposits 359 (116) 243
Other interest-bearing deposits 17 (105) (88)
Borrowings 300 (326) (26)
Total interest-bearing liabilities 641 (1,083) (442)
CHANGE IN NET INTEREST INCOME $ 755 $ (1,173) $ (418)
- -------------------------------------------------------------------------------------------------
12
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three-months ended March 31, 2003 and 2002 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 MARCH 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
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 $505,498 $ 5,545 4.45% $ 446,402 $ 6,552 5.95%
Non-taxable 28,185 465 6.60% 13,122 229 6.98%
Federal funds sold and securities
purchased under agreement to resell - - 642 2 1.26%
Loans, net of unearned income (2) 235,474 3,586 6.18% 213,528 3,673 6.98%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 769,157 9,596 5.06% $ 673,694 10,456 6.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets
Cash and due from banks 22,895 17,914
BOLI 14,205 13,448
Other assets 26,168 22,571
Allowance for possible loan losses (2,533) (2,224)
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest earning
assets 60,735 51,709
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 829,892 $725,403
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities:
money market deposits $ 100,427 306 1.24% $ 108,315 524 1.96%
Savings deposits 155,472 520 1.36% 155,362 873 2.28%
Time deposits 154,084 995 2.62% 100,329 752 3.04%
Other interest - bearing deposits 72,235 128 0.72% 66,644 216 1.31%
Corporation obligated mandatorily
redeemable trust preferred securities 10,000 125 5.00% 10,000 137 5.48%
Short-term borrowings & FHLB advances 166,595 1,161 2.79% 128,777 1,175 3.65%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $658,813 3,235 1.99% $569,427 3,677 2.62%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities:
Demand deposits 113,996 103,538
Other non-interest-bearing deposits 483 514
Other liabilities 5,132 5,661
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest-bearing
liabilities 119,611 109,713
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 51,468 46,263
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
- -----------------------------------------------------------------------------------------------------------------------------------
stockholders' equity $829,892 $ 725,403
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-equivalent basis) $ 6,361 $ 6,779
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Spread 3.07% 3.67%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning-assets (net interest margin) 3.35% 4.08%
- -----------------------------------------------------------------------------------------------------------------------------------
Tax equivalent adjustment (158) (78)
Net interest income $ 6,203 $ 6,701
- -----------------------------------------------------------------------------------------------------------------------------------
(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 three-months ended March 31, 2003, the average volume of investment
securities increased to $533.7 million, or 69.4 percent of average
earning-assets, an increase of $74.2 million from $459.5 million on average for
the same three-month period in 2002. The tax-equivalent yield on the investment
portfolio decreased to 4.51 percent from 5.98 percent for the comparable
three-month period in 2002. The 147 basis points change in yield on the
portfolio was attributable to both the increased volume related factors offset
by the lower yield on purchases made to replace portfolio cash flow including
payments, maturities and called investments. The volume related figures during
the first quarter period contributed an increase in revenue of $1,041,000 while
rate related changes amounted to a decline in interest income of $1,812,000. The
increased size of the investment portfolio largely reflects the continued growth
in the Corporation's balance sheet coupled with continued leverage strategies.
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 re-pricing activity on investment yields was increased to some
extent by a change in bond segmentation to shorter duration securities offset in
part by some portfolio extension, where risk is relatively minimal within the
portfolio resulting in wider spreads. The Corporation also carried on average
$13.2 million in short-term overnight money market investments as compared with
$18.7 for the comparable period in 2002. These funds carried significantly lower
rates than other securities in the portfolio, 1.33 percent in 2003 compared to
1.97 percent in 2002, and are a contributing factor to the decline in yield as
compared to the comparable three-moth period in 2002. The increased volume of
such securities was due to the volatility of interest rates as well as 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-months ended March 31, 2003, the Corporation sold from its
available-for-sale portfolio securities totaling approximately $52.7 million.
At March 31, 2003 the net unrealized gain carried as a component of other
comprehensive income and included in shareholders' equity amounted to a net
unrealized gain of $2,082,000 as compared with an unrealized gain of $540,000 at
March 31, 2002 resulting from continued pullback in the bond market in reaction
to 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. Bond
prices have fallen as interest rates rose in the long end of the yield curve.
LOANS
Loan growth during the first three-months of 2003 occurred primarily in the home
equity and commercial 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 yield for the three-month period was the result of the decline in
interest rates as compared with the comparable period in 2002, coupled with a
competitive rate structure 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 three-months ended March 31, 2003, average
loan volume increased $21.9 million or 10.3 percent, while portfolio yield
decreased by 80 basis points as compared with the same period in 2002. The
effects of the additions made to the portfolio were lessened by continued
re-financing activity which was fueled by historically low interest rates. The
volume related factors contributed increased revenue of $357,000 while rate
related changes amounted to a decrease of $444,000. Total average loans
increased to $235.5 million with a net interest yield of 6.18 percent, as
compared to $213.5 million with a yield of 6.98 percent for the three-months
ended March 31, 2002.
14
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION
The purpose of the allowance for loan losses is to absorb the impact of losses
inherent in the loan portfolio. Additions to the allowance are made through
provisions charged against current operations and through recoveries made on
loans previously charged-off. The allowance for loan losses is maintained at an
amount considered adequate by management to provide for potential credit losses
based upon a periodic evaluation of the risk characteristics of the loan
portfolio. In establishing an appropriate allowance, an assessment of the
individual borrowers, a determination of the value of the underlying collateral,
a review of historical loss experience and an analysis of the levels and trends
of loan categories, delinquencies and problem loans are considered. Such factors
as the level and trend of interest rates and current economic conditions are
also reviewed. At March 31, 2003, the level of the allowance was $2,581,000 as
compared to a level of $2,498,000 at December 31, 2002, and $2,260,000 at March
31, 2002. The Corporation made a provision to the allowance for loan losses of
$80,000 for the three months ended March 31, 2003, and $90,000 in the comparable
period of 2002. The decrease in the provision for loan losses during 2003 was
commensurate with the modest increase in the loan volume recorded during the
year, lower net charge-offs, and the overall level of the allowance as a
percentage of total loans.
At March 31,2003, the allowance for loan losses amounted to 1.06 percent of
total loans. In management's view, the level of the allowance at March 31, 2003
is adequate to cover losses inherent in the loan portfolio. Management's
judgment regarding the adequacy of the allowance constitutes a "Forward Looking
Statement" under the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from management's analysis, based principally
upon the factors considered by management in establishing the allowance.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate, which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's allowance
for loan losses. Such agencies may require the Corporation to increase the
allowance based on their analysis of information available to them at the time
of their examination. Furthermore, the majority of the Corporation's loans are
secured by real estate in the State of New Jersey. Future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions beyond the Corporation's control. The allowance for loan losses as a
percentage of total loans amounted to 1.06 percent and 1.04 percent at March 31,
2003 and 2002, respectively.
During the three month period ended March 31, 2003 the Corporation did not
experience any substantial problems within its loan portfolio. Net charge-offs
were $21,000 in the first quarter of 2002. In the 2003 period, recoveries
exceeded charge-offs by $3,000. During the first quarter of 2003, the
Corporation experienced a reduction in the volume of charge-offs in the
installment loan portfolio compared to 2002 levels. The unfavorable trend in the
level of charge-offs in 2002 was attributed to the economic slow-down and the
resulting higher level of personal bankruptcies.
The Corporation had non-accrual loans amounting to $215,000 at March 31, 2003,
$229,000 at December 31, 2002 and $109,000 at March 31, 2002. The increase in
non-accrual loans for 2003 was attributable to an increase in non-accrual fixed
rate home equity loans, and personal loans, as compared to March 31, 2002. The
Corporation continues to pursue aggressively collections of principal and
interest on loans previously charged-off.
The value of impaired loans is based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. Impaired loans consist of
non-accrual loans and loans internally classified as substandard or below, in
each instance above an established dollar threshold of $200,000. All loans below
the established dollar threshold are considered homogenous and are collectively
evaluated for impairment. At March 31, 2003, total impaired loans amounted to
$12,000 compared with $175,000 at December 31, 2002, and $1,948,000 at March 31,
2002. The reserves allocated to such loans at March 31, 2003, December 31, 2002
and March 31, 2002 were $0, $1,000 and $332,000, respectively. Although
classified as substandard, the impaired loans were current with respect to
principal and interest payments.
15
Changes in the allowance for loan losses for the periods ended March 31, 2003
and 2002, respectively, are set forth below.
ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2003 2002
---- ----
---------------------------------------------
Average loans outstanding $ 235,474 $ 213,528
- --------------------------------------------------------------------------------------------------------------
Total loans at end of period 243,530 216,597
- --------------------------------------------------------------------------------------------------------------
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Balance at the beginning of period 2,498 2,191
Charge-offs:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 2 24
- --------------------------------------------------------------------------------------------------------------
Total charge-offs 2 24
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 5 3
- --------------------------------------------------------------------------------------------------------------
Total recoveries 5 3
Net (Recoveries) Charge-offs: (3) 21
Provisions for loan losses 80 90
- --------------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,581 $ 2,260
- --------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
Average loans outstanding during the period N/M 0.0001%
- --------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of total loans 1.06% 1.04%
- --------------------------------------------------------------------------------------------------------------
ASSET QUALITY
The Corporation manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through review processes that include
analysis of credit requests and ongoing examination of outstanding loans and
delinquencies, with particular attention to portfolio dynamics and mix. The
Corporation strives to identify loans experiencing difficulty early enough to
correct the problems, to record charge-offs promptly based on realistic
assessments of current collateral values, and to maintain an adequate allowance
for loan losses at all times. These practices have protected the Corporation
during economic downturns and periods of uncertainty.
It is generally the Corporation's policy to discontinue interest accruals once a
loan is past due as to interest or principal payments for a period of ninety
days. When a loan is placed on non-accrual, interest accruals cease and
uncollected accrued interest is reversed and charged against current income.
Payments received on non-accrual loans are applied against principal. A loan may
only be restored to an accruing basis when it again becomes well secured and in
the process of collection or all past due amounts have been collected. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to the loan's yield.
Accruing loans past due 90 days or more are generally well secured and in the
process of collection.
16
The outstanding balances of accruing loans, which are 90 days or more past due
as to principal or interest payments, non-accrual loans and other real estate
owned (OREO) at March 31, 2003, December 31, 2002 and March 31, 2002, were as
follows:
NON-PERFORMING LOANS AT MARCH 31, DECEMBER 31, MARCH 31,
(Dollars in thousands) 2003 2002 2002
- ------------------------------------------------------------------------------------------------
Loans past due 90 days and still accruing $ 1 $ - $ 129
Non-accrual loans $ 215 $ 229 $ 109
- ------------------------------------------------------------------------------------------------
Total non-performing loans $ 216 $ 229 $ 238
- ------------------------------------------------------------------------------------------------
Other Real Estate Owned (OREO) $ - $ - $ -
- ------------------------------------------------------------------------------------------------
Total non-performing assets $ 216 $ 229 $ 238
- ------------------------------------------------------------------------------------------------
At March 31, 2003, non-performing assets, consisting of loans on non-accrual
status plus OREO amounted to $215,000 or .09 percent of total loans outstanding
as compared to $229,000 or .10 percent at December 31, 2002 and $109,00 or .05
percent at March 31, 2002.
At March 31, 2003, other than the loans set forth above, the Corporation is not
aware of any loans which present serious doubts as to the ability of its
borrowers to comply with the present loan and repayment terms and which are
expected to fall into one of the categories set forth in the table above. At
March 31, 2003, December 31, 2002 and March 31, 2002, the Corporation did not
have any OREO.
OTHER NON-INTEREST INCOME
The following table represents the principal categories on non-interest income
for the three-month period ended March 31, 2003 and 2002.
THREE MONTHS ENDED
MARCH 31,
- -------------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 % change
- -------------------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees $ 417 $ 379 10.03%
Other income 111 70 58.57%
Bank owned life inusrance 180 180 N/M
Net gains on securities sold 231 186 24.19%
- -------------------------------------------------------------------------------------------
Total other income $ 939 $ 815 15.21%
- -------------------------------------------------------------------------------------------
For the three-months ended March 31, 2003, total other (non-interest) income,
increased $124,000 or 15.21 percent as compared to the three-months ended March
31, 2002. Other non-interest income, exclusive of gains on securities sold
(which increased $45,000), rose $79,000 or 12.56% for the first quarter compared
with the comparable quarter in 2002. Financial institutions typically disclose
non-interest income excluding gains on securities sold (as well as such income
including gains on securities sold) in order to reflect that portion of
non-interest income, which such institutions can manage from quarter to quarter.
The increased service charge revenue was primarily driven by an increase in
deposit account service charge income and ATM fees, which increased in 2003 by
$24,000 and $14,000 respectively when compared to first quarter 2002. Other
income reflected an increase of $41,000 or 58.57 percent due primarily to higher
mortgage banker's fees in the first quarter of 2003 as compared with the first
quarter of 2002.
17
OTHER NO INTEREST EXPENSE
The following table represents the principal categories of non-interest expense
for the three-month period ended March 31, 2003 and 2002.
THREE MONTHS ENDED
March 31,
- -------------------------------------------------------------------------------------
(dollars in thousands) 2003 2002 % change
- -------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 2,651 $ 2,300 15.26%
Occupancy expense, net 528 456 15.79%
Premises & equipment expense 447 389 14.91%
Stationery & printing expense 174 156 11.54%
Marketing & Advertising 177 193 -8.29%
Other expense 756 961 -21.33%
- -------------------------------------------------------------------------------------
Total other expense $ 4,733 $ 4,455 6.24%
- -------------------------------------------------------------------------------------
For the three-month period ended March 31, 2003 total other (non-interest)
expenses increased $278,000 or 6.24 percent over the comparable three-month
period ended March 31, 2002 with increased salary and benefit expense, bank
premise and occupancy expense, and stationary and printing expense accounting
for most of the increase. The period-to-period increases in other operating
expense also include the costs of higher data processing and technology costs.
Control of other expenses will continue to be a key objective of management in
an effort to improve earnings efficiency.
Salaries and employee benefits, increased $351,000 or 15.26 percent for the
three-months ended March 31, 2003. The increase in salaries and employee
benefits for the three-month period ended March 31, 2003 is attributed to higher
staffing levels, coupled with increased expense due to normal merit increases,
promotional raises and higher benefits costs. Staffing levels overall increased
to 186 full-time employees at March 31, 2003 from 177 at March 31, 2002; the
expenses for the quarter ended March 31, 2003 also reflect the expense for the
staffing of the Townhall Banking Center and the lending division.
The increase in occupancy expenses reflects the expense associated with the
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 costs of the expanded bank facilities. For the
three-months ended March 31, 2003, occupancy, premises, and equipment expenses
increased $130,000 or 15.38 percent over the comparable period in 2002,
primarily related to the Corporation's recent branch expansion with the Townhall
Banking Center in Morristown opening in May 2002, and rental increases on other
leased locations. Contributing to the increase in occupancy expense in 2003 was
the increased cost of snow removal, which increased over the 2002 first quarter.
Stationery and printing expense increased 11.54 percent or $18,000 for the three
months ended March 31, 2003 compared with March 31, 2002 primary attributable to
the cost of operating the expanded branch network.
For the three months ended March 31, 2003, total other operating expenses
decreased $205,000 or 21.33 percent over the comparable period in 2002.
Decreases were attributable to decreased levels of legal and consulting expense.
18
PROVISION FOR INCOME TAXES
For the three-month period ended March 31, 2003, the effective tax rate was 27.6
percent compared to 31.5 percent for the three-month period ended March 31,
2002. The effective tax rate continues to be less than the combined statutory
Federal tax rate of 34 percent and the New Jersey State tax rate of 9 percent.
The difference between the statutory and effective tax rates primarily reflects
the tax-exempt status of interest income on obligations of states and political
subdivisions, an increase in the cash surrender value of bank owned life
insurance and disallowed expense items for tax purposes, such as travel and
entertainment expense, as well as amortization of goodwill. Tax-exempt interest
income on a tax-equivalent basis increased by $236,000 or 103.06 percent for the
three months ended March 31, 2002 as compared to the comparable quarter in 2002.
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.
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.
19
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 March 31, 2003, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio of .86:1.00) at the cumulative one-year
position. The Corporation is currently negatively gapped. The impact of a
liability-sensitive position will have a favorable impact on the Corporation's
net interest margins as interest rates declined; however, based on management's
perception that interest rates will continue to be volatile, projected increased
levels of prepayments on the earning-asset portfolio and current level of
interest rates, emphasis has been and is expected to continue to be, placed on
interest-sensitivity matching with the objective of stabilizing the net interest
spread during 2003. However, no assurance can be given that this objective will
be met.
LIQUIDITY MANAGEMENT
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 March 31, 2003, projected to March of 2004, indicates
that the Bank's liquidity should remain strong, with an approximate projection
of $261.3 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 proportion of its liquidity from its core
deposit base. For the three-month period ended March 31, 2003, core deposits
(comprised of total demand, savings accounts (excluding Super Max) and money
market accounts under $100,000) represented 50.3 percent of total deposits as
compared with 49.6 percent at March 31, 2002.
20
The following table depicts the Corporations Core Deposit Mix at March 31, 2003
and 2002.
CORE DEPOSIT MIX
March 31, 2003 March 31, 2002
(dollars in thousands) Balance % Balance % Net Change in Variance
- ---------------------------------------------------------- -----------------------------------------------------------
Demand Deposits $119,920 41.1% $110,005 41.2% 9.0%
Now and ATS Accounts 67,435 23.1% 60,007 22.5% 12.4%
Clubs 385 0.1% 396 0.1% -2.8%
Savings 78,660 27.0% 71,264 26.7% 10.4%
MMA Accounts<$100 25,280 8.7% 25,217 9.5% 0.2%
- ---------------------------------------------------------------------------------------------------------
Total Core Deposits $291,680 100.0% $266,890 100.0% 9.3%
- ---------------------------------------------------------------------------------------------------------
Total deposits $580,096 $538,540 7.7%
- ---------------------------------------------------------------------------------------------------------
Core dep. to Total dep. 50.3% 49.6%
- ---------------------------------------------------------------------------------------------------------
More volatile rate sensitive deposits, concentrated in time certificates of
deposit greater than $100,000, for the three-month period ended March 31, 2003,
increased on average to 7.95 percent of total deposits from 7.81 percent during
the three-months ended March 31, 2002. This change has resulted from a $12.7
million increase in jumbo certificates of deposit, on average for the
three-months ended March 31, 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 first three-months of 2003
were $166.6 million, an increase of $37.8 million or 29.37 percent from $128.8
million in average short-term borrowings during the comparable three-months
ended March 31, 2002.
During the three-months ended March 31, 2003, average funding sources increased
by approximately $99.8 million or 14.82 percent, compared to the same period in
2002. Interest-bearing deposits increased $51.6 million and were comprised
primarily of increases time deposits. Non-interest bearing funding sources as a
percentage of the total funding mix decreased to 14.80 percent on average as
compared to 15.4 percent for the three-month period ended March 31, 2002. This
is primarily attributable to a more rapid growth in time deposits and
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
three-months ended March 31, 2003, cash and cash equivalents (which increased
overall by $3.5 million) were provided (on a net basis) by financing activities
($50.4 million), primarily due to an increase in borrowings of $86.9 million
offset in part by a $36.3 million net decrease in deposits, and by operating
activities of $3.0 million. A total of $49.8 million was used in net investing
activities; principally $34.7 million increase in the investment portfolio and a
$14.5 million increase in loans.
STOCKHOLDERS' EQUITY
Total stockholders' equity averaged $51.5 million or 6.20 percent of average
assets for the three -month period ended March 31, 2003, as compared to $46.3
million, or 6.38 percent, during the same period in 2002. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $105,000 in
new capital for the three-months ended March 31, 2003 as compared with $66,000
for the comparable period in 2002. Book value per common share was $6.20 at
March 31, 2003 as compared to $5.44 at March 31, 2002. Tangible book value
(I.e., book value less goodwill) per common share was $5.95 at March 31, 2003
and $5.19 at March 31, 2002. All common share and per common share amounts have
been restated to reflect the 2 for 1 common stock split declared April 15, 2003,
and payable June 2, 2003 to common stockholders of record on May 19, 2003.
21
CAPITAL
The maintenance of a solid capital foundation continues to be a primary goal for
the Corporation. Accordingly, capital plans and dividend policies are monitored
on an ongoing basis. The most important objective of the capital planning
process is to balance effectively the retention of capital to support future
growth and the goal of providing stockholders with an attractive long-term
return on their investment.
RISK-BASED CAPITAL/LEVERAGE
Banking regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at March 31, 2003, the Bank was
required to maintain (i) a minimum leverage ratio of Tier 1 capital to total
adjusted assets of 4.00%, and (ii) minimum ratios of Tier 1 and total capital to
risk-weighted assets of 4.00% and 8.00%, respectively.
At March 31, 2003, Tier 1 capital (defined as tangible stockholders' equity for
common stock and certain perpetual preferred stock) amounted to $58.2 million or
6.65 percent of total assets. Tier I capital excludes the effect of SFAS No.
115, which amounted to $2,082,000 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 March 31, 2003. At
March 31, 2003, the Corporation's estimated Tier I risk-based and total
risk-based capital ratios were 12.89 percent and 13.46 percent, respectively.
These ratios are well above the minimum guidelines of capital to risk-adjusted
assets in effect as of March 31, 2003.
Under prompt corrective action regulations, bank regulators are required to take
certain supervisory actions land may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of financial institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage (Tier 1) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the bank regulators about capital
components, risk weightings and other factors. As of March 31, 2003, 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. 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 March 31, 2003, and
assuming that Management does not take action to alter the outcome, the
Corporation would expect an increase of 2.96 percent in net interest income if
interest rates decreased 100 basis points from the current rates in an immediate
and parallel shock over a 12-month period. In a rising rate environment, based
on the results of the model as of March 31, 2003, the Corporation would expect a
decrease of 6.36% percent in net interest income if interest rates increased by
200 basis points from current rates in an immediate and parallel shock over a
twelve month period.
22
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.
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 I-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 proving facts and
determining the resolution of legal issues in legal processes.
ITEM 2-CHANGES IN SECURITIES
None
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
23
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of shareholders was held on Tuesday April 15, 2003.
The following Class 2 Directors, whose three-year terms will expire in 2006,
were re-elected with the following share votes:
Hugo Barth III 3,392,951 FOR 230,686 WITHHELD/AGAINST
Alexander A. Bol 3,380,382 FOR 243,255 WITHHELD/AGAINST
Eugene Malinowski 3,398,296 FOR 225,341 WITHHELD/AGAINST
William A. Thompson 3,369,252 FOR 254,385 WITHHELD/AGAINST
The following Class 1 Directors' terms continue until the 2004 Annual Meeting
John J. Davis
Brenda Curtis
Donald G. Kein
Norman F. Schroeder
The following class 3 Directors terms continue until the 2005 Annual Meeting
Robert L. Bischoff
Paul Lomakin, Jr.
James J. Kennedy
Herbert Schiller
ITEM 5- OTHER INFORMATION
None
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
March 31, 2003.
24
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: May 14, 2003 /s/ Anthony C. Weagley
----------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
25
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
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: May 14, 2003
/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
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: May 14, 2003
/s/ Anthony C. Weagley
- ------------------------
Name: Anthony C. Weagley
Title: Treasurer and Chief Financial Officer of Center Bancorp, Inc.
27
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.
28