Back to GetFilings.com
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 June 30, 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.
- --------------------------------------------------------------------------------
(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)
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|_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-12 of the Exchange Act).
Yes|X| No|_|
Common stock, no par value: 8,459,520 shares
- --------------------------------------------------------------------------------
(Title of Class) (Outstanding at July 31, 2003 as restated to
reflect the 2-for-1common stock split
declared April 15, 2003, issued 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 June 30, 2003 (Unaudited) and December 31, 2002 4
Consolidated Statements of Income for the
three and six months ended June 30, 2003 and 2002 5
(Unaudited)
Consolidated Statements of Cash Flows for the
Six months ended June 30, 2003 and 2002 6
(Unaudited)
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-23
Item 3. Qualitative and Quantitative Disclosures about 24
Market Risks
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes In Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to Vote of
Security Holders 25
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Management Certifications 27-29
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 and six months ended June 30, 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.
Consolidated Statements of Condition June 30, December 31,
2003 2002
(Dollars in thousands) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 24,082 $ 23,220
Total cash and cash equivalents 24,082 23,220
Investment securities held to maturity
(approximate market value of $202,712 in 2003 and $219,921 in 2002) 194,523 214,902
Investment securities available-for-sale 361,628 322,717
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities 556,151 537,619
- ----------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 268,260 229,051
Less - Allowance for loan losses 2,655 2,498
- ----------------------------------------------------------------------------------------------------------------------
Net loans 265,605 226,553
- ----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 13,697 12,976
Accrued interest receivable 4,752 4,439
Bank owned separate account life insurance 14,502 14,143
Other assets 2,133 2,395
Goodwill 2,091 2,091
Total assets $ 883,013 $ 823,436
- ----------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Non-interest bearing $ 122,429 $ 116,984
Interest bearing:
Certificates of deposit $100,000 and over 55,486 33,396
Savings and time deposits 403,036 465,971
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 580,951 616,351
- ----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 125,000 65,000
Federal funds purchased and securities sold under agreements to repurchase 104,526 75,431
Corporation - obligated mandatorily redeemable trust preferred securities of subsidiary
trust holding solely junior subordinated debentures of Corporation 10,000 10,000
Accounts payable and accrued liabilities 6,544 5,600
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 827,021 772,382
- ----------------------------------------------------------------------------------------------------------------------
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 9,515,713
and 9,499,114 shares in 2003 and 2002, respectively 19,212 18,984
Additional paid in capital 4,616 4,562
Retained earnings 31,573 29,863
Treasury stock at cost (1,042,068 and 1,078,404 shares in 2003 and 2002, respectively) (4,110) (4,254)
Restricted stock (14) (285)
Accumulated other comprehensive income 4,715 2,185
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 55,992 51,054
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 883,013 $ 823,436
======================================================================================================================
All common stock share and per common share amounts have been restated to
reflect the 2- for- 1common stock split declared on April 15, 2003, issued 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 Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 3,522 $ 3,756 $ 7,108 $ 7,429
Interest and dividends on investment securities:
Taxable interest income 4,874 6,371 10,419 12,923
Nontaxable interest income 680 150 987 301
Interest on Federal funds sold and securities
purchased under agreement to resell 0 7 0 9
- --------------------------------------------------------------------------------------------------------------------
Total interest income 9,076 10,284 18,514 20,662
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on certificates of deposit $100,000 or more 86 115 238 289
Interest on other deposits 1,666 2,165 3,463 4,356
Interest on short-term borrowings 1,455 1,331 2,741 2,643
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 3,207 3,611 6,442 7,288
- --------------------------------------------------------------------------------------------------------------------
Net interest income 5,869 6,673 12,072 13,374
Provision for loan losses 79 90 159 180
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,790 6,583 11,913 13,194
- --------------------------------------------------------------------------------------------------------------------
Other income:
Service charges, commissions and fees 421 395 838 774
Other income 136 95 247 165
BOLI 179 191 359 371
Gain on securities sold 6 56 237 242
- --------------------------------------------------------------------------------------------------------------------
Total other income 742 737 1,681 1,552
- --------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 2,676 2,282 5,327 4,582
Occupancy expense, net 444 382 972 838
Premises and equipment expense 447 395 894 784
Stationery and printing expense 131 148 305 304
Marketing and advertising 112 163 289 356
Other expenses 803 847 1,559 1,808
- --------------------------------------------------------------------------------------------------------------------
Total other expense 4,613 4,217 9,346 8,672
- --------------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,919 3,103 4,248 6,074
Income tax expense 412 1,016 1,055 1,952
- --------------------------------------------------------------------------------------------------------------------
Net income $ 1,507 $ 2,087 $ 3,193 $ 4,122
- --------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ 0.18 $ 0.25 $ 0.38 $ 0.49
Diluted $ 0.18 $ 0.25 $ 0.37 $ 0.49
====================================================================================================================
Average weighted common shares outstanding
Basic 8,465,762 8,395,686 8,453,192 8,371,008
Diluted 8,554,098 8,462,380 8,541,942 8,438,920
====================================================================================================================
All common share and per common share amounts have been adjusted to reflect the
2-for-1 common split declared April 15, 2003 and issued 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)
Six Months Ended
June 30
(Dollars in thousands) 2003 2002
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,193 $ 4,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 888 835
Provision for loan losses 159 180
Gain on sales of investment securities available-for-sale (237) (242)
Increase in accrued interest receivable (313) (393)
Decrease (Increase) in other assets 262 (174)
Increase in Cash Surrender Value of Bank Owned Life Insurance (359) (371)
Increase in other liabilities 944 1,236
Amortization of premium and accretion of
discount on investment securities, net 3,182 533
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,719 5,726
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 128,049 65,812
Purchase of FHLB stock (2,500) (880)
Proceeds from maturities of securities held-to-maturity 98,193 41,148
Proceeds from sales of securities available-for-sale 57,667 34,956
Purchase of securities available-for-sale (229,946) (84,891)
Purchase of securities held-to-maturity (70,411) (58,032)
Net increase in loans (39,209) (16,329)
Property and equipment expenditures, net (1,609) (1,716)
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (59,766) (19,932)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (35,400) 48,170
Dividends paid (1,483) (1,309)
Proceeds from issuance of common stock 697 687
Net increase (decrease) in borrowings 89,095 (2,282)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 52,909 45,266
- --------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 862 31,060
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period $ 23,220 $ 29,668
Cash and cash equivalents at end of period $ 24,082 $ 60,728
- --------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid on deposits and short-term borrowings $ 6,291 $ 7,258
Income taxes $ 1,495 $ 1,810
See Accompanying Notes to Consolidated Financial Statements
6
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of Center Bancorp, Inc. (the Corporation)
are prepared on the accrual basis and include the accounts of the Corporation
and its wholly owned subsidiaries, Union Center National Bank (the Bank) and
Center Bancorp Statutory Trust I. All significant inter-company accounts and
transactions have been eliminated from the accompanying consolidated financial
statements.
Business
The Bank provides a full range of banking services to individual and corporate
customers through branch locations in Union and Morris Counties, New Jersey. The
Bank is subject to competition from other financial institutions, is subject to
the regulations of certain federal 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 2002 to conform to the
classifications presented in 2003. Results for the period ended June 30, 2003
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, 2002 for information regarding
accounting principles.
Note 2: Recent Accounting Pronouncements
SFAS No. 149
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," was issued on April 30, 2003.
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement is not expected to have a significant effect on the Company's
consolidated financial statements.
SFAS No. 150
The Financial Accounting Standards Board (FASB) has issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". The Statement improves the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position.
Statement 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. Statement 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
7
In addition to its requirements for the classification and measurement of
financial instruments in its scope, Statement 150 also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Statement 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The initial adoption of statement 150 did not
have an impact on the corporations consolidated financial statements.
Note 3-Comprehensive Income
The following table outlines the Corporations comprehensive income for the three
and six months ended June 30, 2003 and 2002.
Comprehensive Income Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
Net Income $1,507 $2,087 $3,193 $4,122
Other comprehensive income
Unrealized holding gains arising
during the period, net of taxes 2,637 567 2,686 1,186
Less reclassification adjustment for gains
included in net income (net of taxes) (4) (37) (156) (160)
Other total comprehensive income 2,633 530 2,530 1,026
Total comprehensive income $4,140 $2,617 $5,723 $5,148
===========================================================================================================
Note 4-Earnings Per Share Reconcilement
The following is a reconciliation of the calculation of basic and diluted
earnings per share.
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands, except per share data) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------
Net Income $1,507 $2,087 $3,193 $4,122
Weighted Average Shares 8,466 8,396 8,453 8,371
Effect of Dilutive Stock Options 88 66 89 68
Total Weighted Average Dilutive Shares 8,554 8,462 8,542 8,439
Basic Earnings per Share $0.18 $0.25 $0.38 $0.49
Diluted Earnings per Share $0.18 $0.25 $0.37 $0.49
- -----------------------------------------------------------------------------------------------------------
All common share and per common share amounts have been adjusted to reflect the
2-for-1 common split declared April 15, 2003 and issued June 2, 2003 to common
stockholders of record May 19, 2003.
8
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value recognition provision of FASB
Statement No. 123, Accounting for Stock Based Compensation, to the Corporation's
stock option plans. Stock-based employee compensation cost under the fair value
method was measured using the following weighted-average assumptions for options
granted, dividend yield of 4.0 percent, risk-free interest rate of 4.34 percent
expected volatility of 31.99 percent expected term of 6.0 years and turnover
rate of 0.0 percent.
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Net Income, as reported $ 1,507 $ 2,087 $ 3,193 $ 4,122
Add: Compensation expense
recognized for restricted stock award,
net of related tax effect 9 9 9 9
Deduct: total stock -
based employee compensation expense
determined under fair,
value based method, all awards
Net of related tax effect 15 13 31 26
- ---------------------------------------------------------------------------------------------------
Pro forma net income $ 1,501 $ 2,083 $ 3,171 $ 4,105
Earnings per share:
Basic - as reported $ 0.18 $ 0.25 $ 0.38 $ 0.49
Basic - pro forma $ 0.18 $ 0.25 $ 0.38 $ 0.49
- ---------------------------------------------------------------------------------------------------
Diluted - as reported $ 0.18 $ 0.25 $ 0.37 $ 0.49
Diluted - pro forma $ 0.18 $ 0.25 $ 0.37 $ 0.49
All common share and per common share amounts have been adjusted to reflect the
2-for-1 common split declared April 15, 2003 and issued June 2, 2003 to common
stockholders of record May 19, 2003.
9
ITEM 2-Management's Discussion & Analysis of Financial Condition and Results of
Operations
Cautionary Statement Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q, both in the Management's Analysis and
Discussion and elsewhere, contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about management's confidence and
strategies and management's expectations about new and existing programs and
products, acquisitions, relationships, opportunities, taxation, technology and
market conditions. These statements may be identified by an (*) or such
forward-looking terminology as "expect," "anticipate," "look," "view,"
"opportunities," "allow," "continues," "reflects," "believe," "may," "will" or
similar statements or variations of such terms. Such forward-looking statements
involve certain risks and uncertainties. Factors that may cause actual results
to differ materially from those contemplated by such forward-looking statements
include, but are not limited to, unanticipated deposit out flows, deposit
growth, the direction of the economy in New Jersey, continued levels of loan
quality and origination volume, continued relationships with major customers, as
well as the effects of general economic conditions and legal and regulatory
barriers and the development of new tax strategies or the disallowance of prior
tax strategies. Actual results may differ materially from such forward-looking
statements. The Corporation assumes no obligation for updating any such
forward-looking statement at any time.
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") 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. The Corporation's 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 17 of this Quarterly
Report on Form 10-Q under "Allowance for Loan Losses and Related Provision."
Earnings Analysis
Net income for the six months ended June 30, 2003 amounted to $3,193,000
compared to $4,122,000 earned for the comparable six-month period ended June 30,
2002. On a per diluted share basis, earnings decreased to $.37 per share as
compared with $.49 per share for the six-months ended June 30, 2002. All common
stock per share amounts have been restated to reflect the 2 for 1 common stock
split declared April 15, 2003, to stockholders of record May 19, 2003 and
distributed June 2, 2003. The annualized return on average assets decreased to
..75 percent compared with 1.13 percent for the comparable six-month period in
2002. The annualized return on average stockholders' equity was 12.23 percent
for the six-month period ended June 30, 2003 as compared to 17.62 percent for
the six-months ended June 30, 2002. Earnings performance for the first six
months of 2003 primarily reflects a lower level of net interest income due to
margin compression and increased non-interest expense offset in part by a
reduction in the effective tax rate.
Net income for the three -months ended June 30, 2003 amounted to $1,507,000 as
compared to $2,087,000 earned for the comparable three-month period ended June
30, 2002. On a per diluted share basis, earnings decreased to $.18 per share as
compared with $.25 per share for the three-months ended June 30, 2002. The
annualized return on average assets decreased to .69 percent compared with 1.15
percent for the comparable three-month period in 2002. The annualized return on
average stockholders' equity was 11.39 percent for the three-month period ended
June 30, 2003 as compared to 17.66 percent for the three months ended June 30,
2002. As with the six month comparisons, earnings performance for the three
months ended June 30, 2003 primarily reflects a lower level of net interest
income due to margin compression and increased non-interest expense offset in
part by a reduction in the effective tax rate.
10
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 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.
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. The following table
presents the components of net interest income (on a tax equivalent basis) for
the three and six months ended June 30, 2003 and 2002.
Net Interest Income
(dollars in thousands) Three Months Ended Six Months Ended
June 30, Percent June 30, Percent
2003 2002 Change 2003 2002 Change
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Investments $ 5,904 $6,598 (10.52%) $11,914 $ 13,379 (10.95%)
Loans, including fees 3,522 3,756 (6.23%) 7,108 7,429 (4.32%)
Federal funds sold and securities sold
under agreements to repurchase 0 7 (100.00%) 0 9 (100.00%)
Total interest income 9,426 10,361 (9.02%) 19,022 20,817 (8.62%)
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Certificates $100,000 or more 86 115 25.22% 238 289 (17.65%)
Savings and Time Deposits 1,666 2,165 (23.05%) 3,463 4,356 (20.50%)
FHLB advances 1,059 832 27.28 1,976 1,654 19.47%
Borrowings 396 499 (20.64%) 765 989 (22.65%)
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 3,207 3,611 (11.19%) 6,442 $7,288 (11.61%)
- --------------------------------------------------------------------------------------------------------------------
Net interest income on a fully
tax-equivalent basis 6,219 6,750 (7.87%) 12,580 13,529 (7.01%)
- --------------------------------------------------------------------------------------------------------------------
Tax-equivalent adjustment (350) (77) 354.55% (508) (155) 227.74%
Net interest income * $ 5,869 $6,673 (12.05%) $12,072 $ 13,374 (9.74%)
- --------------------------------------------------------------------------------------------------------------------
* 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 $949,000 or 7.01
percent to approximately $12.6 million for the six months ended June 30, 2003,
from $13.5 million for the comparable period in 2002. For the six months ended
June 30, 2003, the net interest margin decreased 83 basis points to 3.18 percent
from 4.01 percent due primarily to lower rates earned on interest earning
assets. For the six months ended June 30, 2003, a decrease in the average yield
on interest earning assets of 138 basis points was only partially offset by a
decrease in the average cost of interest-bearing liabilities of 68 basis points,
which was not sufficient to sustain the Corporation's net interest margins.
Net interest income on a fully tax-equivalent basis decreased $531,000 or 7.9
percent to $6.2 million for the three months ended June 30, 2003, from $6.8
million for the comparable period in 2002. For the three months ended June 30,
2003, the net interest margin decreased 95 basis points to 3.05 percent from
4.00 percent due primarily to lower rates earned on interest-earning assets. For
the three-months ended June 30, 2003, a decrease in the average yield on
interest earning assets of 152 basis points was only partially offset by a
decrease in the average cost of interest-bearing liabilities of 72 basis points,
which was not sufficient to sustain the Corporation's net interest margins.
Interest income on a full-tax-equivalent basis for the six-month period ended
June 30, 2003 decreased by $1,795,000 or 8.62 percent, versus the comparable
period ended June 30, 2002. This decrease, reflecting the decline in the yield
on this portfolio, occurred notwithstanding an increase in average earning
assets. The Corporation's loan portfolio
11
increased on average $24.5 million to $242.4 million from $218.0 million in the
same period of 2002. This growth was primarily driven by growth in commercial
loans and commercial and residential mortgages. The loan portfolio represented
30.6 percent of the Corporation's interest earning assets (on average) during
the first six months of 2003 and 32.3 percent in the same period in 2002.
Average investment volume during the period increased $94.4 million on average
compared to 2002. The growth in earning assets was funded primarily through
increased levels of money market and savings deposits, and borrowings.
For the three-month period ended June 30, 2003 interest income on a
tax-equivalent basis decreased by $935,000 or 9.02 percent over the comparable
three-month period in 2002. This decrease, also reflecting the decline in the
yield on this portfolio, occurred notwithstanding an increase in average earning
assets. The Corporation's loan portfolio increased on average $26.9 million to
$249.3 million from $222.4 million in the same quarter in 2002, primarily driven
by growth in commercial loans and commercial and residential mortgages. The loan
portfolio represented approximately 30.6 percent of the Corporation's interest
earning assets (on average) during the second quarter of 2003 and 32.9 percent
in the same quarter in 2002. Average investment volume increased during the
period $114.5 million on average compared to 2002. The growth in earning assets
was funded primarily through increased levels of money market and savings
deposits, and borrowings.
The factors underlying the year-to year changes in net interest income are
reflected in the tables appearing on pages 11, 13, 14 and 15, each of which has
been presented on a tax-equivalent basis (assuming a 34 percent tax rates). The
table on pages 14 and 15 (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 the
interest income as a percentage of average interest-earning assets, for the six
and three month periods ended June 30, 2003 and 2002. The table presented on
page 13 (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.
Average Federal funds sold and securities purchased under agreements to resell
decreased both for the six and three month periods in 2003 compared to 2002. For
the six months ended June 30, 2003 the decrease amounted to approximately
$999,000. For the three months ended June 30, 2003 the decrease amounted to
approximately $1.4 million.
Interest expense for the six months ended June 30, 2003 decreased $846,000 or
11.6 percent from the comparable six-month period ended June 30, 2002, as a
result of a decline in interest rates coupled with higher average volumes of
lower cost interest-bearing liabilities and borrowings. A $2.4 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 a $1.5
million increases in interest expense attributable to volume related factors.
Interest expense for the three months ended June 30, 2003 decreased $404,000 or
11.2 percent from the comparable three-month period ended June 30, 2002, as a
result of a decline in interest rates and coupled with higher average volumes of
lower cost interest-bearing liabilities and borrowings. A $1.3 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 an
$880,000 increase in interest expense attributable to volume related factors.
For both the three and six month periods, short-term interest rates have
decreased as a result of monetary policy promulgated by the Federal Reserve Open
Market Committee. The Fed has lowered the Federal Funds index rate on, November
6 , 2002 and June 25, 2003. Since June 2002 the Federal Funds rate has fallen 75
basis points.
For the six months ended June 30, 2003, 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) decreased to 2.90 percent from 3.60 percent
for the six months ended June 30, 2002. 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 a decline in
interest rates, despite the volumes of interest-bearing checking, money market
and savings deposits in addition to short-term borrowings. The Federal Reserve
open market committee lowered interest rates for a thirteenth time on June 25,
2003, 25 basis points to a 45-year low of 1.0 percent. Although the yield on
interest-earning assets declined to 4.80 percent from 6.18 percent in 2002 (a
change of 138 basis points), this change was partially 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 1.90 percent, a change of 68 basis points, for the six months ended
June 30, 2003 from 2.58 percent for the six months ended June 30, 2002.
12
For the three months ended June 30, 2003, the Corporation's net interest spread
on a tax-equivalent basis decreased to 2.78 percent from 3.58 percent for the
three months ended June 30, 2002. The decrease reflected a narrowing of spreads
between yields earned on loans and investments and rates paid for supporting
funds. Net interest margins compressed due primarily to a continued decline in
interest rates. The protracted lower interest rate environment has had a
negative effect on interest margins. Rates fell an additional 25 basis point
during the quarter as the Federal Reserve lowered the target Federal Funds rate
on June 25. The Fed had lowered the federal funds index 13 times from 6.5% over
the past two years. Although the yield on interest-earning assets declined to
4.63 percent from 6.15 percent in 2002 (a change of 152 basis points), this
change was offset in part 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 1.85 percent or 72 basis points,
for the three months ended June 30, 2003 from 2.57 percent for the three months
ended June 30, 2002.
The trend is primarily due to the previously discussed 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 on a Tax Equivalent Basis Due to
Volume and Rates
(Tax-Equivalent Basis) Three Months Ended 6/30/03 Six Months Ended 6/30/03
2003/2002 Increase/(Decrease) 2003/2002 Increase/(Decrease)
Due to Change in: Due to Change in:
-----------------------------------------------------------------------------
(dollars in thousands) Average Average Net Average Average Net
Interest-earning assets Volume Rate Change Volume Rate Change
- ----------------------------------------------------------------------------------------------------------------------
Investment Securities
Taxable $ 770 $(2,267) $(1,497) $ 1,561 ($4,065) ($2,504)
Non-taxable 841 (38) 803 1,101 (62) 1,039
Federal funds sold and securities
purchased under agreement to resell (7) 0 (7) (9) 0 (9)
Loans, net of unearned discount 423 (657) (234) 782 (1,103) (321)
- ----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 2,027 $(2,962) $ (935) $ 3,435 ($5,230) ($1,795)
- ----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money Market deposits $ (8) $ (184) $ (192) $ (44) $ (366) $ (410)
Savings deposits (1) (533) (534) (1) (886) (887)
Time deposits 192 106 298 549 (8) 541
Other interest-bearing deposits 0 (100) (100) 17 (205) (188)
Borrowings 697 (552) 145 1,028 (897) 131
Trust Preferred 0 (21) (21) 0 (33) (33)
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 880 $(1,284) $ (404) $ 1,549 $(2,395) $ (846)
- ----------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,147 $(1,678) $ (531) $ 1,886 ($2,835) $ (949)
- ----------------------------------------------------------------------------------------------------------------------
13
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the six months ended June 30, 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
Six Month
Period Ended June 30,
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 $500,617 $10,419 4.16% $441,898 $12,923 5.85%
Non-taxable 48,778 1,495 6.13% 13,071 456 6.98%
Federal funds sold and securities
purchased under agreement to resell 0 0 0 999 9 1.80%
Loans, net of unearned income (2) 242,445 7,108 5.86% 217,984 7,429 6.82%
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets $791,840 $19,022 4.80% 673,952 20,817 6.18%
- -----------------------------------------------------------------------------------------------------------------
Non-interest earning assets
Cash and due from banks 21,907 18,387
BOLI 14,301 13,545
Other assets 26,756 23,201
Allowance for possible loan losses (2,571) (2,260)
- -----------------------------------------------------------------------------------------------------------------
Total non-interest earning assets 60,393 52,873
- -----------------------------------------------------------------------------------------------------------------
Total assets $852,233 $726,825
- -----------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $95,351 570 1.20% $100,080 980 1.96%
Savings deposits 156,450 1,039 1.33% 156,504 1,926 2.46%
Time deposits 143,884 1,867 2.60% 101,553 1,326 2.61%
Other interest bearing deposits 69,835 225 0.64% 67,047 413 1.23%
Borrowings 201,477 2,494 2.48% 130,497 2,363 3.62%
Trust Preferred 10,000 247 4.94% 10,000 280 5.60%
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 676,997 6,442 1.90% 565,681 7,288 2.58%
- -----------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 117,322 108,047
Other noninterest-bearing deposits 468 511
Other liabilities 5,251 5,817
- -----------------------------------------------------------------------------------------------------------------
Total noninterest-bearing liabilities 123,041 114,375
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity 52,195 46,769
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $852,233 $ 726,825
- -----------------------------------------------------------------------------------------------------------------
Net interest income (tax-equivalent basis) $12,580 $13,529
Net Interest Spread 2.90% 3.60%
- -----------------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning-assets 3.18% 4.01%
- -----------------------------------------------------------------------------------------------------------------
Tax equivalent adjustment (3) (508) (155)
- -----------------------------------------------------------------------------------------------------------------
Net interest income $12,072 $13,374
- -----------------------------------------------------------------------------------------------------------------
(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
14
The following table, "Average Balance Sheet with Interest and Average Rates",
presents for the three months ended June 30, 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 June 30,
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 $495,838 $4,874 3.93% $437,444 $6,371 5.83%
Non-taxable 69,097 1,030 5.96% 13,020 227 6.97%
Federal funds sold and securities
purchased under agreement to resell 0 0 0 1,352 7 2.07%
Loans, net of unearned income (2) 249,340 3,522 5.65% 222,389 3,756 6.76%
- ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets $814,275 $9,426 4.63% 674,205 10,361 6.15%
- ----------------------------------------------------------------------------------------------------------------
Non-interest earning assets
Cash and due from banks 20,930 18,856
BOLI 14,395 13,641
Other assets 27,338 23,825
Allowance for possible loan losses (2,609) (2,296)
- ----------------------------------------------------------------------------------------------------------------
Total non-interest earning assets 60,054 54,026
- ----------------------------------------------------------------------------------------------------------------
Total assets $874,329 $728,231
- ----------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Interest-bearing liabilities:
Money Market deposits $90,331 264 1.17% $91,934 456 1.98%
Savings deposits 157,419 519 1.32% 157,634 1,053 2.67%
Time deposits 133,797 872 2.61% 102,764 574 2.23%
Other interest bearing deposits 67,461 97 0.58% 67,446 197 1.17%
Borrowings 235,974 1,333 2.26% 132,198 1,188 3.59%
Trust Preferred 10,000 122 4.88% 10,000 143 5.60%
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 694,982 3,207 1.85% 561,976 3,611 2.57%
- ----------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 120,611 112,506
Other noninterest-bearing deposits 453 509
Other liabilities 5,369 5,971
- ----------------------------------------------------------------------------------------------------------------
Total noninterest-bearing liabilities 126,433 118,986
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity 52,914 47,269
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $874,329 $728,231
- ----------------------------------------------------------------------------------------------------------------
Net interest income (tax-equivalent basis) $6,219 $6,750
Net Interest Spread 2.78% 3.58%
- ----------------------------------------------------------------------------------------------------------------
Net interest income as percent
of earning-assets 3.05% 4.00%
- ----------------------------------------------------------------------------------------------------------------
Tax equivalent adjustment (3) (350) (77)
Net interest income $5,869 $ 6,673
- ----------------------------------------------------------------------------------------------------------------
(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
15
Investments
For the six months ended June 30, 2003, the average volume of investment
securities increased to approximately $549.4 million, or 69.4 percent of average
earning assets, an increase of $94.4 million on average as compared to the same
period in 2002. The tax-equivalent yield on investments decreased by 154 basis
points to 4.34 percent from a yield of 5.88 percent during the six month period
ended June 30, 2003. The 154 basis points decline in yield on the portfolio was
attributable to lower rates that prevailed for both additional volume added to
the portfolio coupled with purchases made to replace maturing and called
investments made at lower rates. Heightened prepayment speeds also contributed
to the acceleration of the downward repricing of yield on mortgage-related
securities in the portfolio. The volume related figures during the six month
period ended June 30, 2003 contributed an increase in revenue of $2.7 million,
while rate related changes amounted to a decline in revenue of $4.1 million. The
increased size of the investment portfolio for both the six and three months
ended June 30, 2003 largely reflects the Corporation's leverage strategies,
coupled with the investment of excess deposits.
For the three months ended June 30, 2003, the average volume of investment
securities, increased to approximately $564.9 million, or 69.4 percent of
average earning assets, an increase of $114.5 million on average as compared to
the same period in 2002. The tax-equivalent yield on investments decreased by
168 basis points to 4.18 percent from a yield of 5.86 percent during the three
month period ended June 30, 2003. The 168 basis points decline in yield on the
portfolio was attributable primarily to the lower interest rate environment
which increased the volume of securities called from the portfolio coupled with
extraordinary prepayment levels negatively affecting the returns on mortgage
related securities. Heightened prepayment levels during 2003 have led to
accelerated prepayments on these securities and the increased volume of
additional cash flow was reinvested at lower rates than in comparable periods.
The volume related figures during the three-month period ended June 30, 2003
contributed an increase in revenue of $1.6 million, while rate related changes
amounted to a decline of $2.3 million. At June 30, 2003, the principal
components of the investment portfolio are U.S. Government Federal Agency
callable and non-callable securities, including agency issued collateralized
mortgage obligations, corporate securities and municipals.
The impact of repricing activity on investment yields was increased to some
extent, for both the three and six month periods ended June 30, 2003, by the
change in portfolio mix and shortening of portfolio duration. In addition, there
was some portfolio extension where risk is relatively minimal within the
portfolio, resulting in wider spreads. The Corporation also carried on average
$15.3 million and $18.0 million, in short-term overnight money market and
federal funds as compared with $15.4 million and $17.2 million for the
comparable three and six month periods in 2002, respectively. These funds
carried significantly lower rates than other securities in the portfolio (on
average 1.63 percent and 1.47 percent for the three and six month periods,
respectively, compared to 1.89 percent and 1.98 percent earned on these
overnight funds for the comparable period in 2002.) and contributed to the
decline in yield as compared to the comparable periods in 2002. The increased
volume of such overnight funds in both the six and three 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 six-month period ended June 30, 2003 the Corporation sold from its
available-for-sale portfolio securities totaling approximately $5.0 million and
$57.7 million, respectively.
At June 30, 2003 the net unrealized gain carried as a component of other
comprehensive income and included in shareholders' equity net of tax amounted to
a net unrealized gain of $4.7 million as compared with an unrealized gain of
$2.1 million at June 30, 2002, resulting from a decline in interest rates
fostered by the Federal Open Market Committee's actions to continue to lower the
Federal Funds target rate, most recently by 25 basis points on June 25, as an
economic stimulus.
Loans
Loan growth during the six months ended June 30, 2003 occurred primarily in the
residential 1-4 family home equity loans and commercial loan portfolio. This
growth resulted from the Corporation's business development efforts, aggressive
marketing campaigns on its home equity and 10- year residential mortgage loan
products. These have been enhanced in recent years by the Corporation's expanded
branch network. The decrease in the loan portfolio yields for the three and six
month periods was the result of the decline in interest rates as compared with
the comparable period in 2002, coupled with a competitive rate pricing structure
maintained by the Corporation to attract new loans and further-by the heightened
competition for lending relationships that exists in the Corporation's market.
The Corporation's desire to grow this segment of the earning-asset mix is
reflected in its current business development plan and marketing plans, as well
as its short-term strategic plan.
16
Analyzing the loan portfolio for the six-month period ended June 30, 2003,
average loan volume increased $24.5 million or 11.2 percent, while portfolio
yield decreased by 96 basis points as compared with the same period in 2002. The
volume related factors during the period-contributed increased revenue of
$782,000 while rate related changes amounted to a reduction in income of $1.1
million. Total average loan volume increased to $242.4 million with a net
interest yield of 5.86 percent, as compared to $218.0 million with a yield of
6.82 percent for the six months ended June 30, 2002.
For the three months ended June 30, 2003, average loan volume increased $27.0
million or 12.1 percent, while portfolio yield decreased by 111 basis points as
compared with the same period in 2002. The volume related factors during the
period-contributed increased revenue of $423,000 while rate related changes
amounted to a decline in revenue of $657,000. Total average loan volume
increased to $249.3 million with a net interest yield of 5.65 percent, as
compared to $222.4 million with a yield of 6.76 percent for the three months
ended June 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 June 30, 2003, the
allowance amounted to $2,655,000 as compared to $2,498,000 at December 31, 2002,
and $2,343,000 at June 30, 2002. The Corporation had a provision to the
allowance for loan losses during the six and three month periods ended June 30,
2003 amounting to $159,000 and $79,000, respectively, compared to $180,000 and
$90,000 during the six and three month periods ended June 30, 2002,
respectively. The additions to the provision during the six and three month
periods of 2003 was reflected the loan volume recorded during the periods and
the Corporation's focus on the changing composition of the commercial and
residential real estate loan portfolios.
At June 30, 2003, the allowance for loan losses amounted to .99 percent of total
loans, as compared with 1.03 percent at June 30, 2002. In management's view, the
level of the allowance as of June 30, 2003 is adequate to cover the risk of loss
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 factors considered by management in establishing the allowance.
Although management uses the best information available, the level of the
allowance for loan losses remains as 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 six and three-month periods ended June 30, 2003 and 2002, the
Corporation did not experience any substantial credit problems within its loan
portfolio. Net charge-offs were approximately $2,000 and were comprised of
installment loans as compared with net charge-offs of $28,000 for the comparable
six month period in 2002, which were also comprised of installment loans.
At June 30, 2003 the Corporation had non-accrual loans amounting to $69,000 as
compared with $229,000 at December 31, 2002 and $115,000 of non-accrual loans at
June 30, 2002. The Corporation continues to aggressively pursue collections of
principal and interest on loans previously charged-off. The decrease in such
loans in 2003 compared to June 30, 2002 was attributable to a home equity loan,
which was charged-off, and a residential mortgage loan, which were re-paid in
full by the borrower.
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
17
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 June 30,
2003, total impaired loans were approximately $82,000 compared to $175,000 at
December 31, 2002 and $2,135,000 at June 30, 2002. The reserves allocated to
such loans at June 30, 2003, December 31, 2002 and June 30, 2002, were $1,000,
$1,000 and $332,000, respectively. 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 six-month periods
ended June 30, 2003 and 2002, respectively, are set forth below.
Allowance for loan losses
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------
Six Months Ended June 30,
2003 2002
- ------------------------------------------------------------------------------------------------
Average loans outstanding $242,445 $217,984
- ------------------------------------------------------------------------------------------------
Total loans at end of period 268,260 227,538
- ------------------------------------------------------------------------------------------------
Analysis of the allowance for loan losses
Balance at the beginning of year 2,498 2,191
Charge-offs:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 10 34
- ------------------------------------------------------------------------------------------------
Total charge-offs 10 34
Recoveries:
Commercial 0 0
Real estate-mortgage 0 0
Installment loans 8 6
- ------------------------------------------------------------------------------------------------
Total recoveries 8 6
Net Charge-offs: 2 28
Provision for Loan Losses 159 180
Balance at end of period $2,655 $2,343
- ------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
average loans outstanding during the period n/m 0.01%
- ------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of total loans 0.99% 1.03%
- ------------------------------------------------------------------------------------------------
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.
At June 30, 2003, December 31, 2002 and June 30, 2002, the Corporation had no
restructured loans. Non-accrual loans amounted to $69,000 at June 30, 2003, and
were comprised of three consumer loans and two home equity loans. At December
31, 2002, non-accrual loans amounted to $229,000 and were comprised of first and
second lien residential mortgages. At June 30, 2002, non-accrual loans amounted
to $115,000 and were comprised of first and second lien residential mortgages.
At June 30, 2003 the Corporation's loans 90 days past due and still accruing
amounted to $11,000. Such loans amounted to $0 at December 31, 2002 and $0 at
June 30, 2002.
18
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 June 30, 2003,
December 31, 2002 and June 30, 2002, were as follows:
Non-Performing Loans At
June 30, December 31, June 30,
(Dollars in thousands) 2003 2002 2002
- --------------------------------------------------------------------------------------------
Loans past due 90 days and still accruing $11 $0 $0
Non-accrual loans 69 229 115
Total non-performing loans 80 229 115
Total non-performing assets $80 $229 $115
- --------------------------------------------------------------------------------------------
At June 30, 2003, non-performing assets, consisting of loans on non-accrual
status plus other real estate owned (OREO), amounted to $69,000 or .03 percent
of total loans outstanding as compared to $229,000 or .10 percent at December
31, 2002 and $115,000 or .05 percent at June 30, 2002.
At June 30, 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
June 30, 2003, December 31, 2002 and June 30, 2002 the Corporation did not have
any other real estate owned or restructured loans.
Other Non-Interest Income
The following table presents the principal categories of non-interest income for
the three and six month periods ended June 30, 2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2003 2002 % change 2003 2002 % change
- ---------------------------------------------------------------------------------------------------
Other non-interest income:
Service charges, commissions and fees $421 $395 6.58% $838 $774 8.27%
Other income. 136 95 43.16% 247 165 49.70%
Bank Owned Life Insurance 179 191 (6.28%) 359 371 (3.23%)
Net gain on securities sold 6 56 (89.29%) 237 242 (2.07%)
- ---------------------------------------------------------------------------------------------------
Total other non-interest income $742 $737 0.68% $1,681 $1,552 8.31%
- ---------------------------------------------------------------------------------------------------
For the six-month period ended June 30, 2003, total other (non-interest) income
increased 129,000 or 8.3 percent as compared to the comparable six-month period
in 2002. Other non-interest income, exclusive of gains on securities sold (which
decreased $5,000 or 2.07 percent), reflects an increase of $134,000 or 10.2
percent compared with the comparable six-month period ended June 30, 2002. This
increased revenue was primarily driven by the increase in other income which
reflected an increase of $82,000 or 49.7 percent due primarily to increased
letter of credit fees and fees from secondary market activity on mortgage loans
during the six months ended June 30, 2003 as compared with the comparable period
in 2002. Service charges, commissions and fees, which amounted to $838,000
increased $64,000 or 8.27 percent for the six months ended June 30, 2003 as
compared to $774,000 for the comparable period in 2002. This increase primarily
related to increased business service charges and ATM fee revenue.
For the three month period ended June 30, 2003, total other (non-interest)
income increased $5,000 or .69 percent as compared to the comparable three-month
period in 2002. Other non-interest income, exclusive of net gains on securities
sold (which decreased $50,000 or 89.3 percent), reflects an increase of $55,000
or 8.1 percent compared with the comparable three month period ended June 30,
2002. This increased revenue was primarily driven by higher level of other
income which reflected an increase of $41,000 or 43.2 percent due primary to
increased letter of credit fees and increased loan servicing, and loan
documentation fees and gains on sale of loans during the three months ended June
30, 2003 as compared with the comparable period in 2002.
For the three and six month periods ended June 30, 2003, the Corporation
recorded net gains of $6,000 and $237,000, respectively, on securities sold from
the available-for-sale investment portfolio compared to gains of $56,000 and
$242,000 recorded in the 2002 comparable periods. These sales were made in the
normal course of business and proceeds were reinvested in securities.
19
Other Non-Interest Expense
The following table presents the principal categories of non-interest expense
for the three and six month periods ended June 30, 2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2003 2002 % change 2003 2002 % change
- ---------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits $2,676 $2,282 17.27% $5,327 $4,582 16.26%
Occupancy expense, net 444 382 16.23% 972 838 15.99%
Premise & equipment expense 447 395 13.16% 894 784 14.03%
Stationery and printing expense 131 148 (11.49%) 305 304 0.33%
Marketing & Advertising 112 163 (31.29%) 289 356 (18.82%)
Legal and Consulting 96 105 (8.57%) 196 245 (20.00%)
Other expenses 707 742 (4.72%) 1,363 1,563 (12.80%)
- ---------------------------------------------------------------------------------------------------------------
Total other expense $4,613 $4,217 9.40% $9,346 $8,672 7.77%
- ---------------------------------------------------------------------------------------------------------------
For the six month period ended June 30, 2003 total other (non-interest) expenses
increased $674,000 or 7.8 percent over the comparable six months ended June 30,
2002, with increased salary and benefit expense, occupancy expenses and Bank
premise and equipment expense accounting for most of the increase. Effective
January 1, 2002, the Corporation adopted SFAS No. 142 "Goodwill and Intangible
Assets", under which periodic goodwill amortization has ceased. Accordingly
there was no amortization expense in 2002 or 2003.
For the three months ended June 30, 2003 total other (non-interest) expenses
increased $396,000 or 9.4 percent over the comparable three-months ended June
30, 2002, with increased salary and benefit expense, occupancy expense and Bank
premise and equipment expense accounting for most of the increase.
The level of operating expenses during both the six and three month periods of
2003 were unfavorably impacted by an increase in the expense categories noted
above. The year to year increase in expenses is primarily attributable to the
Corporation's continued investment in technology and expanded facilities and the
need to attract, develop, and retain high caliber employees. The Corporation's
ratio of other expenses (annualized) to average assets decreased to 2.19 percent
in the first six months of 2003 from 2.33 percent for the first six months of
2002.
Salaries and employee benefits increased $745,000 or 16.3 percent in the six
months of 2003 over the comparable six month period ended June 30, 2002. This
increase is primarily attributable to normal merit increases, promotional
raises, higher benefit costs and increased staffing levels. Staffing levels
overall increased to 194 full-time equivalent employees at June 30, 2003
compared to 180 full-time equivalent employees at June 30, 2002. For the three
months ended June 30, 2003 salaries and benefits increased $394,000 or 17.3
percent. This increase is primarily attributable to higher staffing levels due
to the opening of the Town Hall banking center, as well as higher benefit costs.
For the six months ended June 30, 2003 occupancy and premises and equipment
expense increased $244,000 or 15.0 percent over the comparable six-month period
in 2002. The increase in occupancy and Bank premise and equipment expenses
reflects the expense associated with higher operating costs (utilities, rent,
real-estate axes 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
June 30, 2003, such expenses increased $114,000 or 14.7 percent as compared with
the comparable three month period in 2002.
Provision for Income Taxes
For the three and six-month periods ended June 30, 2003, the effective tax rate
was 22 percent and 33 percent respectively, compared to 25 percent and 32
percent, respectively, for the three and six month periods ended June 30, 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. Tax-exempt interest income on a tax-equivalent basis
increased by $530,000 or 453 percent and $680,000 or 325.9 percent for the three
and six months ended June 30, 2003, respectively, as compared to the comparable
periods in 2002.
20
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.
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.
21
At June 30, 2003, the Corporation reflects a negative interest sensitivity gap
(or an interest sensitivity ratio) of 1.16 at the cumulative one-year position.
During most of 2002, the Corporation had a negative interest sensitivity gap.
The maintenance of a liability-sensitive position during 2002 had a favorable
impact on the Corporation's net interest margins. Conversely, at June 30, 2003
the Corporation maintained an asset-sensitive position which has had a negative
impact on 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 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 June 30, 2003, projected to July of 2004, indicates
that the Bank's liquidity should remain strong, with an approximate projection
of 276% 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 six-month period ended June 30, 2003, core deposits
(comprised of total demand, savings accounts (excluding Super Max and money
market accounts under $100,000) remained relatively stable and represented 51.1
percent of total deposits as compared with 50.6 percent at June 30, 2002.
The following table depicts the Corporations Core Deposit Mix as of June 30,
2003 and 2002.
Core Deposit Mix
June 30, 2003 June 30 2002 Net Change
(dollars in thousands) Balance % Balance % in Variance
- --------------------------------------------------------------------------------------------------------------
Demand Deposits $122,429 41.2% $112,543 40.7% 8.8%
Now and ATS Accounts 69,247 23.3% 64.653 23.4% 7.1%
Clubs 447 0.2% 444 0.2% 7.0%
Savings 79,478 26.8% 73,818 26.7% 7.7%
MMA Accounts <$100 25,199 8.5% 24,870 9.0% 1.3%
- --------------------------------------------------------------------------------------------------------------
Total Core Deposits $296,800 100.0% $276,328 100.0% 7.4%
- --------------------------------------------------------------------------------------------------------------
Total Deposits $580,951 $546,003 6.4%
- --------------------------------------------------------------------------------------------------------------
Core deposit to total deposit 51.10% 50.6% 0.5%
- --------------------------------------------------------------------------------------------------------------
More volatile rate sensitive deposits, concentrated in time certificates of
deposit greater than $100,000, for the six-month period ended June 30, 2003,
increased slightly on average to 9.83 percent of total deposits from 7.62
percent during the six-months ended June 30, 2002. This change has resulted from
a $25.4 million increase in time deposits on average for the six-months ended
June 30, 2003 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 six-months ended June 30,
2003 were $201.5 million, an increase of $71.0 million or 54.4 percent from
$130.5 million in average borrowings during the comparable six-months ended June
30, 2002.
22
During the six-months ended June 30, 2003, average funding sources increased by
approximately $120.5 million or 17.9 percent, compared to the same period in
2002. Interest-bearing deposit liabilities increased approximately $111.3
million on average and were comprised primarily of increases in time deposits,
other then interest bearing deposits and borrowings and an increase in time
deposits greater than $100,000. Non-interest bearing funding sources as a
percentage of the total funding mix decreased to 14.8 percent on average as
compared to 16.7 percent for the six-month period ended June 30, 2002. This
reflects 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 six
months ended June 30, 2003, cash and cash equivalents (which increased overall
by $862,000 million) were provided (on a net basis) by financing activities of
approximately $52.9 million primarily due to an increase in borrowings of $89.1
million offset in part by a $35.4 million net decrease in deposits, and by
operating activities (approximately $7.7 million). Approximately $59.8 million
was used in net investing activities, principally a $39.2 million increase in
loans and an $18.9 million increase in the investment portfolio.
Stockholders' Equity
Total stockholders' equity averaged $52.2 million or 6.12 percent of average
assets for the six month period ended June 30, 2003, as compared to $46.8
million, or 6.43 percent, during the same period in 2002. The Corporation's
dividend reinvestment and optional stock purchase plan contributed $228,000 in
new capital for the six-months ended June 30, 2003 as compared with $168,000 for
the comparable period in 2002. Book value per common share was $6.61 at June 30,
2003 as compared to $5.80 at June 30, 2002. Tangible book value (i.e., book
value less goodwill) per common share was $6.36 at June 30, 2003 and $5.56 at
June 30, 2002.
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 June 30, 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 June 30, 2003, total Tier 1 capital (defined as tangible stockholders' equity
for common stock and certain perpetual preferred stock) amounted to $59.2
million or 6.79 percent of total assets. Tier I capital excludes the effect of
SFAS No. 115, $4.7 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 June 30, 2003. At June 30, 2003,
the Corporation's estimated Tier I risk-based and total risk-based capital
ratios were 11.58 percent and 12.10 percent, respectively. These ratios are well
above the minimum guidelines of capital to risk-adjusted assets in effect as of
June 30, 2003.
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%.
23
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 June 30, 2003, management
believes that each of the Bank and the Corporation meet 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 June 30, 2003, and
assuming that management does not take action to alter the outcome, the
Corporation would expect an increase of 1.09 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 June 30, 2003, the Corporation would expect a
decrease of 4.74% 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.
The statements in this Quarterly Report regarding the effects of hypothetical
interest rate changes represent forward- looking statements under the Privacy
Securities Litigation Reform Act of 1995. Actual results could differ materially
from these statements. 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
(a) Disclosure controls and procedures. As of the end of the Company's most
recently completed fiscal quarter (the registrant's fourth fiscal quarter
in the case of an annual report) covered by this report, the Company
carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures pursuant to Securities Exchange Act Rule 13a-15.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There have been no
changes in the Company's internal controls over financial reporting that
occurred during the company's last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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.
24
Item 2-Changes in Securities
None
Item 3-Defaults Upon Senior Securities
None
Item 4- Submission of Matters to a Vote if Securities Holders
See Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
Item 5 - Other information
None
Item 6- Exhibits and Reports on Form 8-K
A) Exhibits:
10.1 Amendment to the 1993 Outside Director Stock Option Plan
31.1 Certification of the Chief Executive Officer under section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer under section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer under section 906 of the Sarbanes-Oxley act of 2002.
B) Reports on Form 8-K
Current Report on Form 10-Q on April 21, 2003, reporting (under Items 7
and 12) the filing of a press release containing quarterly results of
operations.
25
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: August 13, 2003 /s/ Anthony C. Weagley
---------------------------------
Anthony C. Weagley, Treasurer
(Chief Financial Officer)
26